QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 814-00659
PROSPECT CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
Maryland
43-2048643
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
10 East 40th Street, 42nd Floor
New York, New York
10016
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (212) 448-0702
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbols
Name of each exchange on which registered
Common Stock, $0.001 par value
PSEC
NASDAQ Global Select Market
5.35% Series A Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.001
PSEC PRA
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
(Do not check if a smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
As of May 6, 2022, there were 392,150,844 shares of the registrant’s common stock, $0.001 par value per share, outstanding.
This report contains information that may constitute “forward-looking statements.” Generally, the words “believe,” “expect,”
“intend,” “estimate,” “anticipate,” “project,” “will,” “should,” “could,” “may,” “plan” and similar expressions identify forward-looking statements, which generally are not historical in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future—including statements relating to volume growth, share of sales and earnings per share growth, and statements expressing general views about future operating results—are forward-looking statements. Management believes that these forward-looking statements are reasonable as and when made. However, caution should be taken not to place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part II, “Item 1A. Risk Factors” and elsewhere in this report and in our Annual Report on Form 10-K for the year ended June 30, 2021, and those described from time to time in reports that we have filed or in the future may file with the Securities and Exchange Commission.
The forward-looking statements contained in this report involve a number of risks and uncertainties, including statements concerning:
•our future operating results;
•our business prospects and the prospects of our portfolio companies;
•the impact of investments that we expect to make;
•our contractual arrangements and relationships with third parties;
•the dependence of our future success on the general economy and its impact on the industries in which we invest;
•the impact of global health epidemics, including, but not limited to, the recent and ongoing novel coronavirus pandemic, on our and our portfolio companies’ business and the global economy;
•uncertainty surrounding the financial stability of the United States, Europe, and China;
•the ability of our portfolio companies to achieve their objectives;
•difficulty in obtaining financing or raising capital, especially in the current credit and equity environment, and the impact of a protracted decline in the liquidity of credit markets on our and our portfolio companies’ business;
•the level and volatility of prevailing interest rates and credit spreads, magnified by the current turmoil in the credit markets;
•the impact of changes in the London Interbank Offered Rate (“LIBOR”), the cessation of publication of certain LIBOR rates as of March 31, 2022 and in the future and the new use of the Secured Overnight Financing Rate (“SOFR”) on our operating results;
•adverse developments in the availability of desirable loan and investment opportunities whether they are due to competition, regulation or otherwise;
•a compression of the yield on our investments and the cost of our liabilities, as well as the level of leverage available to us;
•our regulatory structure and tax treatment, including our ability to operate as a business development company and a regulated investment company;
•the adequacy of our cash resources and working capital;
•the timing of cash flows, if any, from the operations of our portfolio companies;
•the ability of our investment adviser to locate suitable investments for us and to monitor and administer our investments;
•authoritative generally accepted accounting principles or policy changes from such standard-setting bodies as the Financial Accounting Standards Board, the Securities and Exchange Commission, Internal Revenue Service, the NASDAQ Global Select Market, the New York Stock Exchange LLC, and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business; and
•any of the other risks, uncertainties and other factors we identify herein or in our Annual Report on Form 10-K for the year ended June 30, 2021.
3
PART I
Item 1. Financial Statements
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF ASSETS AND LIABILITIES
(in thousands, except share and per share data)
March 31, 2022
June 30, 2021
(Unaudited)
(Audited)
Assets
Investments at fair value:
Control investments (amortized cost of $2,588,661 and $2,482,431, respectively)
$
3,378,505
$
2,919,717
Affiliate investments (amortized cost of $237,845 and $202,943, respectively)
417,652
356,734
Non-control/non-affiliate investments (amortized cost of $4,061,431 and $3,372,750, respectively)
3,633,774
2,925,327
Total investments at fair value (amortized cost of $6,887,937 and $6,058,124, respectively)
7,429,931
6,201,778
Cash
36,402
63,610
Receivables for:
Interest, net
12,969
12,575
Other
525
365
Deferred financing costs on Revolving Credit Facility (Note 4)
11,504
11,141
Due from broker
4,055
12,551
Prepaid expenses
299
1,072
Total Assets
7,495,685
6,303,092
Liabilities
Revolving Credit Facility (Notes 4 and 8)
699,440
356,937
Public Notes (less unamortized discount and debt issuance costs of $23,601 and $20,061, respectively) (Notes 6 and 8)
1,341,858
1,114,717
Prospect Capital InterNotes® (less unamortized debt issuance costs of $7,196 and $10,496, respectively) (Notes 7 and 8)
333,578
498,215
Convertible Notes (less unamortized debt issuance costs of $2,794 and $4,123, respectively) (Notes 5 and 8)
213,875
263,100
Due to Prospect Capital Management (Note 13)
56,399
48,612
Dividends payable
23,529
23,313
Interest payable
19,501
27,359
Due to broker
—
14,854
Accrued expenses
3,417
5,151
Due to Prospect Administration (Note 13)
2,855
4,835
Other liabilities
338
482
Total Liabilities
2,694,790
2,357,575
Commitments and Contingencies (Note 3)
Preferred Stock, par value $0.001 per share (167,900,000 shares authorized, with 40,000,000 shares of preferred stock authorized for each of the Series A1, Series M1, and Series M2 and 20,000,000 shares of preferred stock authorized for each of the Series AA1 and Series MM1 and 1,000,000 shares of preferred stock authorized for the Series A2 and 6,900,000 shares of preferred stock authorized for the Series A; 16,394,214 Series A1 shares issued and outstanding; 1,380,203 Series M1 shares issued and outstanding; 0 Series M2 shares issued and outstanding; 0 Series AA1 shares issued and outstanding; 0 Series MM1 shares issued and outstanding; 187,000 Series A2 shares issued and outstanding; and 6,000,000 Series A shares issued and outstanding as of March 31, 2022) at carrying value plus cumulative accrued and unpaid dividends (Note 9)
564,884
—
Net Assets as of June 30, 2021
$
—
$
3,945,517
Net Assets Applicable to Common Shares as of March 31, 2022
$
4,236,011
$
—
Components of Net Assets Applicable to Common Shares and Net Assets, respectively
Preferred Stock, par value $0.001 per share (141,000,000 shares authorized, with 40,000,000 shares of preferred stock authorized for each of the Series A1, Series M1, and Series M2 and 20,000,000 shares of preferred stock authorized for the Series AA1 and 1,000,000 shares of preferred stock authorized for the Series A2; 5,163,926 Series A1 shares issued and outstanding; 130,666 Series M1 shares issued and outstanding; 0 Series M2 shares issued and outstanding; 0 Series AA1 shares issued and outstanding; and 187,000 Series A2 shares issued and outstanding as of June 30, 2021) (Note 9)
$
—
137,040
Common stock, par value $0.001 per share (1,832,100,000 common shares authorized; 391,718,136 and 388,419,573 issued and outstanding, respectively) (Note 9)
392
388
Paid-in capital in excess of par (Note 9 and 12)
4,039,944
4,018,659
Total distributable earnings (loss) (Note 12)
195,675
(210,570)
Net Assets as of June 30, 2021
$
—
$
3,945,517
Net Assets Applicable to Common Shares as of March 31, 2022
$
4,236,011
$
—
Net Asset Value Per Common Share (Note 16)
$
10.81
$
9.81
See notes to consolidated financial statements.
4
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Investment Income
Interest income:
Control investments
$
53,095
$
52,056
$
166,036
$
151,416
Affiliate investments
6,745
6,145
23,497
24,333
Non-control/non-affiliate investments
65,037
52,846
182,698
156,125
Structured credit securities
17,612
28,536
58,702
84,735
Total interest income
142,489
139,583
430,933
416,609
Dividend income:
Control investments
5,197
1,384
12,134
3,645
Affiliate investments
95
—
95
—
Non-control/non-affiliate investments
14
18
48
62
Total dividend income
5,306
1,402
12,277
3,707
Other income:
Control investments
26,571
15,877
55,306
45,493
Affiliate investments
19
38
3,961
102
Non-control/non-affiliate investments
7,046
2,556
23,804
8,717
Total other income (Note 10)
33,636
18,471
83,071
54,312
Total Investment Income
181,431
159,456
526,281
474,628
Operating Expenses
Base management fee (Note 13)
36,426
29,183
102,472
83,866
Income incentive fee (Note 13)
19,967
18,251
59,296
53,354
Interest and credit facility expenses
29,235
32,773
86,952
100,549
Allocation of overhead from Prospect Administration (Note 13)
4,126
2,685
10,891
10,768
Audit, compliance and tax related fees
994
989
1,940
2,267
Directors’ fees
131
113
360
339
Other general and administrative expenses
3,547
2,060
10,439
10,977
Total Operating Expenses
94,426
86,054
272,350
262,120
Net Investment Income
87,005
73,402
253,931
212,508
Net Realized and Net Change in Unrealized Gains (Losses) from Investments
Net realized gains (losses)
Control investments
5,298
121
5,304
2,953
Affiliate investments
—
745
—
4,469
Non-control/non-affiliate investments
(7,552)
15
(17,386)
29
Net realized (losses) gains
(2,254)
881
(12,082)
7,451
Net change in unrealized gains
Control investments
96,162
142,379
352,558
323,967
Affiliate investments
(11,610)
21,876
26,016
107,582
Non-control/non-affiliate investments
(4,066)
20,705
19,766
87,028
Net change in unrealized gains
80,486
184,960
398,340
518,577
Net Realized and Net Change in Unrealized Gains from Investments
78,232
185,841
386,258
526,028
Net realized (losses) on extinguishment of debt
(941)
(12,835)
(10,149)
(18,415)
Net Increase in Net Assets Resulting from Operations
164,296
246,408
630,040
720,121
Preferred stock dividends
7,139
400
16,748
446
Net Increase in Net Assets Resulting from Operations applicable to Common Stockholders
$
157,157
$
246,008
$
613,292
$
719,675
Basic and diluted earnings per common share (Note 11)
Basic
$
0.40
$
0.64
$
1.57
$
1.89
Diluted
$
0.38
$
0.63
$
1.50
$
1.88
Weighted-average shares of common stock outstanding (Note 11)
Basic
391,091,485
385,996,921
389,981,608
380,985,329
Diluted
432,808,120
389,420,855
419,914,712
382,259,257
See notes to consolidated financial statements.
5
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
(in thousands, except share data)
(Unaudited)
Common Stock
For the Three Months Ended March 31, 2022
Shares
Par
Paid-in-capital in excess of par(1)
Distributable Earnings (Loss)(1)
Total Net Asset Applicable to Common Shares
Balance as of December 31, 2021(1)
390,584,255
$391
$
4,030,760
$
108,977
$
4,140,128
Net Increase in Net Assets resulting from Operations:
Net investment income
87,005
87,005
Net realized losses
(3,195)
(3,195)
Net change in unrealized gains
80,486
80,486
Distributions to Shareholders
Distributions from earnings
(77,578)
(77,578)
Capital Transactions
Shares issued through reinvestment of dividends
1,120,220
1
9,049
9,050
Conversion of preferred stock to common stock
13,661
—
115
115
Tax reclassifications of net assets (Note 12)
20
(20)
—
Total increase for the three months ended March 31, 2022
1,133,881
1
9,184
86,698
95,883
Balance as of March 31, 2022
391,718,136
$
392
$
4,039,944
$
195,675
$
4,236,011
Preferred Stock
Common Stock
For the Three Months Ended March 31, 2021
Liquidation Value
Shares
Par
Paid-in capital in excess of par(1)
Distributable earnings (loss)(1)
Total Net Assets
Balance as of December 31, 2020
$
13,786
384,097,645
$384
$
4,023,978
$
(581,628)
$
3,456,520
Net Increase in Net Assets resulting from Operations:
Net investment income
73,402
73,402
Net realized losses
(11,954)
(11,954)
Net change in unrealized gains
184,960
184,960
Distributions to Shareholders(1)
Distributions from earnings
(58,979)
(58,979)
Return of capital to common stockholders(Note 12)
(11,024)
(11,024)
Capital Transactions
Issuance of preferred stock
53,185
(5,579)
47,606
Shares issued through reinvestment of dividends
9
3,292,927
3
21,297
21,309
Conversion of preferred stock to common stock
(80)
9,982
—
80
—
Total increase for the three months ended March 31, 2021
53,114
3,302,909
3
4,774
187,429
245,320
Balance as of March 31, 2021(1)
$
66,900
387,400,554
$
387
$
4,028,752
$
(394,199)
$
3,701,840
(1) Certain reclassifications have been made in the presentation of prior year and prior quarter amounts to conform to the presentation for the current fiscal year. See Note 2 and Note 12 within the accompanying notes to consolidated financial statements for further discussion.
See notes to consolidated financial statements.
6
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
(in thousands, except share data)
(Unaudited)
Preferred Stock
Common Stock
Nine Months Ended March 31, 2022
Liquidation Value
Shares
Par
Paid-in capital in excess of par(1)
Distributable earnings (loss)(1)
Total Net Assets
Balance as of June 30, 2021(1)
$
137,040
388,419,573
$388
$
4,018,659
$
(210,570)
$
3,945,517
Net Increase in Net Assets Resulting from Operations:
Net investment income
253,931
253,931
Net realized losses
(22,231)
(22,231)
Net change in unrealized gains
398,340
398,340
Distributions to Shareholders(1)
Distributions from earnings
(223,775)
(223,775)
Return of capital to common stockholders (Note 12)
(3,695)
(3,695)
Capital Transactions
Issuance of preferred stock
7,866
(13,239)
(5,373)
Reclassification of preferred stock issuance costs to temporary equity(3)
11,970
11,970
Shares issued through reinvestment of dividends
8
3,268,814
4
25,970
25,982
Conversion of preferred stock to common stock
29,749
259
259
Reclassification of preferred stock to temporary equity(2)
(144,914)
(144,914)
Tax reclassifications of net assets (Note 12)
20
(20)
—
Total (decrease) increase for the nine months ended March 31, 2022
(137,040)
3,298,563
4
21,285
406,245
290,494
Balance as of March 31, 2022
$
—
391,718,136
$
392
$
4,039,944
$
195,675
$
4,236,011
Preferred Stock
Common Stock
Nine Months Ended March 31, 2021
Liquidation Value
Shares
Par
Paid-in capital in excess of par(1)
Distributable earnings (loss)(1)
Total Net Assets
Balance as of June 30, 2020
$
—
373,538,499
$
374
$
3,986,417
$
(930,930)
$
3,055,861
Net Increase in Net Assets Resulting from Operations:
Net investment income
212,508
212,508
Net realized losses
(10,964)
(10,964)
Net change in unrealized gains
518,577
518,577
Distributions to Shareholders(1)
Distributions from earnings
(183,447)
(183,447)
Return of capital to common stockholders(Note 12)
(23,287)
(23,287)
Capital Transactions
Issuance of Preferred Stock
66,971
(7,610)
59,361
Shares issued through reinvestment of dividends
9
13,852,073
13
73,209
73,231
Conversion of preferred stock to common stock
(80)
9,982
80
—
Tax reclassifications of net assets (Note 12)
(57)
57
—
Total increase for the nine months ended March 31, 2021
66,900
13,862,055
13
42,335
536,731
645,979
Balance as of March 31, 2021(1)
$
66,900
387,400,554
$
387
$
4,028,752
$
(394,199)
$
3,701,840
(1) Certain reclassifications have been made in the presentation of prior year and prior quarter amounts to conform to the presentation for the current fiscal year. See Note 2 and Note 12 within the accompanying notes to consolidated financial statements for further discussion.
(2) Preferred Stock issued prior to our 5.35% Series A Preferred Stock issuance reclassified to temporary equity. Refer to Note 9 within the accompanying notes to the consolidated financial statements for further discussion.
(3) Preferred stock issuance costs include offering costs and underwriting costs related to the issuance of preferred stock. During the nine months ended March 31, 2022, we have reclassified all preferred stock issuance costs related to preferred stock issued as temporary equity following our reclassification of preferred stock during the three months ended September 30, 2021. Refer to Note 9 within the accompanying notes to the consolidated financial statements for further discussion.
See notes to consolidated financial statements.
7
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share data)
(Unaudited)
Nine Months Ended March 31,
2022
2021
Operating Activities
Net increase in net assets resulting from operations
$
630,040
$
720,121
Net realized losses on extinguishment of debt
10,149
18,415
Net realized losses (gains) on investments
12,082
(7,451)
Net change in unrealized (gains) on investments
(398,340)
(518,577)
Amortization of discounts (accretion of premiums), net
62,435
(17,163)
Accretion of original issue discount
2,063
903
Amortization of deferred financing costs
6,242
5,527
Payment-in-kind interest
(61,030)
(58,750)
Structuring fees
(16,437)
(20,620)
Change in operating assets and liabilities:
Payments for purchases of investments
(1,767,402)
(701,768)
Proceeds from sale of investments and collection of investment principal
940,539
673,329
(Decrease) increase in due to broker
(14,854)
48,668
Increase in due to Prospect Capital Management
7,787
4,960
Increase in interest receivable, net
(394)
(1,892)
Decrease in interest payable
(7,858)
(12,335)
Decrease in accrued expenses
(1,734)
(217)
Decrease in due from broker
8,496
1,524
Decrease in other liabilities
(144)
(1,252)
Increase in other receivables
(160)
(179)
Increase in due from Prospect Administration
—
(38)
Decrease in prepaid expenses
773
1,053
Decrease in due to Prospect Administration
(1,980)
(3,255)
Net Cash (Used in) Provided by Operating Activities
(589,727)
131,003
Financing Activities
Borrowings under Revolving Credit Facility (Note 4)
1,627,051
668,000
Principal payments under Revolving Credit Facility (Note 4)
(1,284,548)
(561,999)
Issuances of Public Notes, net of original issue discount (Note 6)
294,798
395,781
Redemptions of Public Notes (Note 6)
(69,319)
(290,419)
Redemptions of Convertible Notes, net (Note 5)
(51,872)
(199,626)
Issuances of Prospect Capital InterNotes® (Note 7)
155,909
109,562
Redemptions of Prospect Capital InterNotes®, net (Note 7)
(323,846)
(116,511)
Financing costs paid and deferred
(11,206)
(6,053)
Proceeds from issuance of preferred stock, net of underwriting costs
429,433
61,823
Offering costs from issuance of preferred stock
(4,184)
(2,462)
Dividends paid and distributions to stockholders
(199,697)
(132,671)
Net Cash Provided by (Used in) Financing Activities
562,519
(74,575)
Net (Decrease) Increase in Cash
(27,208)
56,428
Cash at beginning of period
63,610
44,561
Cash at End of Period
$
36,402
$
100,989
Supplemental Disclosures
Cash paid for interest
$
86,505
$
106,454
Non-Cash Financing Activities
Value of shares issued through reinvestment of dividends
$
26,083
$
73,222
See notes to consolidated financial statements.
8
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF MARCH 31, 2022 (Unaudited)
(in thousands, except share data)
March 31, 2022 (Unaudited)
Portfolio Company
Industry
Investments(1)(37)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
Control Investments (greater than 25.00% voting control)(40)
CP Energy Services Inc. (20)
Energy Equipment & Services
First Lien Term Loan
10/1/2017
12.01% (3ML+ 11.00%)
1.00
1/31/2024
$45,322
$45,322
$45,322
1.1%
(10)(39)
First Lien Term Loan A to Spartan Energy Services, LLC
10/20/2014
9.00% (1ML+ 8.00%)
1.00
12/31/2022
26,258
26,258
26,258
0.6%
(10)(39)
Series A Preferred Units to Spartan Energy Holdings, Inc. (10,000 shares)
9/25/2020
—
N/A
—
26,193
26,193
0.6%
(16)
Series B Convertible Preferred Stock (790 shares)
10/30/2015
—
N/A
—
63,225
20,688
0.5%
(16)
Common Stock (102,924 shares)
8/2/2013
—
N/A
—
86,240
—
—%
(16)
247,238
118,461
2.8%
Credit Central Loan Company, LLC (21)
Consumer Finance
First Lien Term Loan
12/28/2012
10.00% plus 10.00% PIK
—
6/30/2025
74,702
72,602
74,702
1.9%
(14)(39)
Class A Units (14,867,312 units)
12/28/2012
—
N/A
—
19,331
11,454
0.3%
(14)(16)
Net Revenues Interest (25% of Net Revenues)
1/28/2015
—
N/A
—
—
—
—%
(14)(16)
91,933
86,156
2.2%
Echelon Transportation, LLC
Aerospace & Defense
First Lien Term Loan
3/31/2014
6.00% (1ML+ 4.00%)
2.00
3/31/2024
53,209
53,209
53,209
1.3%
(10)(39)
Preferred Units (32,842,586 shares)
1/31/2022
—
N/A
—
32,843
14,750
0.3%
(16)
Membership Interest (100%)
3/31/2014
—
N/A
—
22,738
—
—%
(16)
108,790
67,959
1.6%
First Tower Finance Company LLC (23)
Consumer Finance
First Lien Term Loan to First Tower, LLC
6/24/2014
10.00% plus 12.00% PIK
—
2/18/2025
348,484
348,484
348,484
8.3%
(14)(39)
Class A Units (95,709,910 units)
6/14/2012
—
N/A
—
31,146
296,672
7.0%
(14)(16)
379,630
645,156
15.3%
Freedom Marine Solutions, LLC (24)
Energy Equipment & Services
Membership Interest (100%)
11/9/2006
—
N/A
—
44,492
11,938
0.3%
(16)
44,492
11,938
0.3%
InterDent, Inc.
Health Care Providers & Services
First Lien Term Loan A/B
8/1/2018
16.65% (1ML+ 14.65%)
2.00
9/5/2025
14,249
14,249
14,249
0.3%
(10)
First Lien Term Loan A
8/3/2012
6.50% (1ML+ 5.50%)
1.00
9/5/2025
96,773
96,773
96,773
2.3%
(3)(10)
First Lien Term Loan B
8/3/2012
12.00% PIK
—
9/5/2025
157,644
157,644
157,644
3.8%
(39)
Common Stock (99,900 shares)
5/3/2019
—
N/A
—
45,118
141,091
3.3%
(16)
313,784
409,757
9.7%
Kickapoo Ranch Pet Resort
Diversified Consumer Services
Membership Interest (100%)
8/26/2019
—
N/A
—
2,378
3,833
0.1%
(16)
2,378
3,833
0.1%
MITY, Inc. (25)
Commercial Services & Supplies
First Lien Term Loan A
9/19/2013
10.00% (3ML+ 7.00%)
3.00
4/30/2025
31,944
31,944
31,944
0.8%
(10)(39)
First Lien Term Loan B
6/23/2014
10.00% (3ML+ 7.00%) plus 10.00% PIK
3.00
4/30/2025
18,404
18,404
18,404
0.4%
(10)(39)
Unsecured Note to Broda Enterprises ULC
9/19/2013
10.00%
—
1/1/2028
5,719
7,200
5,719
0.1%
(14)
Common Stock (42,053 shares)
9/19/2013
—
N/A
—
27,349
4,428
0.1%
(16)
84,897
60,495
1.4%
See notes to consolidated financial statements.
9
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF MARCH 31, 2022 (Unaudited)
(in thousands, except share data)
March 31, 2022 (Unaudited)
Portfolio Company
Industry
Investments(1)(37)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
Control Investments (greater than 25.00% voting control)(40)
First Lien Delayed Draw Term Loan - $10,000 Commitment
3/25/2020
10.50% (3ML+ 8.50%)
2.00
12/30/2024
—
—
—
—%
(10)(15)
First Lien Term Loan
12/30/2019
10.50% (3ML+ 8.50%)
2.00
12/30/2024
4,874
4,874
4,874
0.1%
(3)(10)
Common Stock (21,418 shares)
12/30/2019
—
N/A
—
12,869
42,014
1.1%
17,743
46,888
1.2%
Pacific World Corporation (36)
Personal Products
First Lien Revolving Line of Credit - $26,000 Commitment
9/26/2014
8.25% (1ML+ 7.25%)
1.00
9/26/2025
20,825
20,825
20,825
0.5%
(10)(15)
First Lien Term Loan A
12/31/2014
6.25% PIK (1ML+ 5.25%)
1.00
9/26/2025
41,625
41,625
41,625
1.1%
(10)(39)
Convertible Preferred Equity (287,021 shares)
6/15/2018
—
N/A
—
186,795
8,647
0.2%
(16)
Common Stock (6,778,414 shares)
9/29/2017
—
N/A
—
—
—
—%
(16)
249,245
71,097
1.8%
R-V Industries, Inc.
Machinery
First Lien Term Loan
12/15/2020
10.00% (3ML+ 9.00%)
1.00
12/15/2028
28,622
28,622
28,622
0.7%
(3)(10)
Common Stock (745,107 shares)
6/26/2007
—
N/A
—
6,866
21,071
0.5%
(16)
35,488
49,693
1.2%
Universal Turbine Parts, LLC (34)
Trading Companies & Distributors
First Lien Delayed Draw Term Loan - $5,000 Commitment
2/28/2019
10.25% (1ML+ 7.75%)
2.50
4/5/2024
3,173
3,173
3,173
0.1%
(10)(15)
First Lien Term Loan A
7/22/2016
6.75% (3ML+ 5.75%)
1.00
4/5/2024
29,575
29,575
23,933
0.6%
(10)
Preferred Units (47,244,213 units)
3/31/2021
—
N/A
—
32,500
—
—%
(16)
Common Stock (10,000 units)
12/10/2018
—
N/A
—
—
—
—%
(16)
65,248
27,106
0.7%
USES Corp. (30)
Commercial Services & Supplies
First Lien Term Loan A
3/31/2014
9.00% PIK
—
7/29/2024
55,117
30,651
31,815
0.8%
(9)
First Lien Term Loan B
3/31/2014
15.50% PIK
—
7/29/2024
77,483
35,568
—
—%
(9)
First Lien Term Loan
12/30/2020
10.00% (1ML+ 9.00%)
1.00
7/29/2024
2,000
2,000
2,000
0.1%
(10)
Common Stock (268,962 shares)
6/15/2016
—
N/A
—
—
—
—%
(16)
68,219
33,815
0.9%
Valley Electric Company, Inc. (31)
Construction & Engineering
First Lien Debt to Valley Electric Co. of Mt. Vernon, Inc.
12/31/2012
8.00% (3ML+ 5.00%) plus 2.50% PIK
3.00
12/31/2024
10,430
10,430
10,430
0.3%
(3)(10)(39)
First Lien Term Loan
6/24/2014
8.00% plus 10.00% PIK
—
6/23/2024
33,301
33,301
33,301
0.8%
(39)
Consolidated Revenue Interest (2.0%)
6/22/2018
—
N/A
—
—
1,857
—%
(12)
Common Stock (50,000 shares)
12/31/2012
—
N/A
—
26,204
104,107
2.6%
69,935
149,695
3.7%
Total Control Investments (Level 3)
$
2,482,431
$
2,919,717
74.0%
See notes to consolidated financial statements.
20
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Affiliate Investments (5.00% to 24.99% voting control)(43)
Nixon, Inc. (32)
Textiles, Apparel & Luxury Goods
Common Stock (857 units)
5/12/2017
—
N/A
$
—
$
—
$
—
—%
(16)
—
—
—%
PGX Holdings, Inc. (6)
Diversified Consumer Services
First Lien Term Loan
11/13/2020
6.25% (12ML+ 5.25%) plus 4.25% PIK
1.00
9/29/2023
47,746
45,720
47,746
1.2%
(3)(10)(39)
1.5 Lien Term Loan
5/27/2020
14.50% PIK (12ML+ 13.50%)
1.00
6/28/2024
18,164
18,164
18,164
0.5%
(10)(39)
Second Lien Term Loan
9/29/2014
15.75% PIK (1ML+ 14.75%)
1.00
9/29/2024
122,272
122,272
122,272
3.1%
(10)(39)
Common Stock (40,780,359 shares)
5/27/2020
—
N/A
—
—
124,907
3.2%
(16)
186,156
313,089
8.0%
RGIS Services, LLC
Commercial Services & Supplies
First Lien Term Loan
6/25/2020
8.50% (1ML+ 7.50%)
1.00
6/25/2025
3,680
3,680
3,680
0.1%
(8)(10)
Membership Interest (5.11%)
6/25/2020
—
N/A
—
10,302
13,760
0.3%
(16)
13,982
17,440
0.4%
Targus Cayman HoldCo Limited (33)
Textiles, Apparel & Luxury Goods
Common Stock (7,383,395 shares)
2/12/2016
—
N/A
—
2,805
26,205
0.6%
(16)
2,805
26,205
0.6%
Total Affiliate Investments (Level 3)
$
202,943
$
356,734
9.0%
See notes to consolidated financial statements.
21
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
8th Avenue Food & Provisions, Inc.
Food Products
Second Lien Term Loan
9/21/2018
7.84% (1ML+ 7.75%)
—
10/1/2026
$
27,133
$
26,980
$
27,133
0.7
%
(3)(8)(10)
26,980
27,133
0.7
%
ACE Cash Express, Inc.
Consumer Finance
First Lien Term Loan
12/8/2017
12.00%
—
12/15/2022
39,998
37,429
38,041
1.0
%
(8)(46)
37,429
38,041
1.0
%
AmeriLife Holdings, LLC
Insurance
Second Lien Term Loan
3/18/2020
9.50% (6ML+ 8.50%)
1.00
3/18/2028
22,280
21,911
22,280
0.6
%
(3)(8)(10)
21,911
22,280
0.6
%
Apidos CLO XI
Structured Finance
Subordinated Structured Note
12/6/2012
Residual Interest, current yield 12.33%
—
4/17/2034
67,783
37,651
29,680
0.8
%
(5)(14)
37,651
29,680
0.8
%
Apidos CLO XII
Structured Finance
Subordinated Structured Note
3/15/2013
Residual Interest, current yield 11.99%
—
4/15/2031
52,203
37,818
30,505
0.8
%
(5)(14)
37,818
30,505
0.8
%
Apidos CLO XV
Structured Finance
Subordinated Structured Note
9/13/2013
Residual Interest, current yield 12.46%
—
4/21/2031
48,515
39,005
29,579
0.7
%
(5)(14)
39,005
29,579
0.7
%
Apidos CLO XXII
Structured Finance
Subordinated Structured Note
9/16/2015
Residual Interest, current yield 13.92%
—
4/21/2031
35,855
30,483
26,070
0.7
%
(5)(14)
30,483
26,070
0.7
%
Atlantis Health Care Group (Puerto Rico), Inc.
Health Care Providers & Services
First Lien Revolving Line of Credit - $3,000 Commitment
2/21/2013
10.75% (3ML+ 8.75%)
2.00
4/29/2022
—
—
—
—
%
(10)(15)
First Lien Term Loan
2/21/2013
10.75% (3ML+ 8.75%)
2.00
4/29/2022
66,164
66,164
66,164
1.7
%
(3)(10)
66,164
66,164
1.7
%
Barings CLO 2018-III
Structured Finance
Subordinated Structured Note
10/9/2014
Residual Interest, current yield 6.65%
—
7/20/2029
83,098
44,174
32,346
0.8
%
(5)(14)
44,174
32,346
0.8
%
BCPE North Star US Holdco 2, Inc.
Food Products
Second Lien Delayed Draw Term Loan - $5,185 Commitment
6/7/2021
8.00% (3ML+ 7.25%)
0.75
6/10/2023
—
—
—
—
%
(8)(10)(15)
Second Lien Term Loan
6/7/2021
8.00% (3ML+ 7.25%)
0.75
6/11/2029
29,815
29,520
29,815
0.8
%
(8)(10)
29,520
29,815
0.8
%
Broder Bros., Co.
Textiles, Apparel & Luxury Goods
First Lien Term Loan
12/4/2017
9.75% (3ML+ 8.50%)
1.25
12/2/2022
162,639
162,639
162,639
4.1
%
(3)(10)
162,639
162,639
4.1
%
Brookside Mill CLO Ltd.
Structured Finance
Subordinated Structured Note
4/25/2013
Residual Interest, current yield 0.00%
—
1/17/2028
36,300
15,168
10,018
0.3
%
(5)(14)(17)
15,168
10,018
0.3
%
California Street CLO IX Ltd.
Structured Finance
Subordinated Structured Note
4/19/2012
Residual Interest, current yield 13.70%
—
7/16/2032
58,915
42,626
29,610
0.8
%
(5)(14)
42,626
29,610
0.8
%
Candle-Lite Company, LLC
Household Products
First Lien Term Loan A
1/23/2018
6.75% (3ML+ 5.50%)
1.25
1/23/2023
10,237
10,237
10,237
0.3
%
(3)(10)
First Lien Term Loan B
1/23/2018
10.75% (3ML+ 9.50%)
1.25
1/23/2023
10,949
10,949
10,949
0.3
%
(3)(10)
21,186
21,186
0.6
%
Capstone Logistics Acquisition, Inc.
Commercial Services & Supplies
Second Lien Delayed Draw Term Loan - $1,500 Commitment
11/12/2020
9.75% (1ML+ 8.75%)
1.00
11/13/2028
—
—
—
—
%
(8)(10)(15)
Second Lien Term Loan
11/12/2020
9.75% (1ML+ 8.75%)
1.00
11/13/2028
8,500
8,206
8,500
0.2
%
(3)(8)(10)
8,206
8,500
0.2
%
Carlyle C17 CLO Limited
Structured Finance
Subordinated Structured Note
1/24/2013
Residual Interest, current yield 17.47%
—
4/30/2031
24,870
15,736
13,618
0.3
%
(5)(14)
15,736
13,618
0.3
%
See notes to consolidated financial statements.
22
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Carlyle Global Market Strategies CLO 2014-4-R, Ltd.
Structured Finance
Subordinated Structured Note
4/7/2017
Residual Interest, current yield 17.07%
—
7/15/2030
$
25,534
$
19,980
$
16,864
0.4
%
(5)(14)
19,980
16,864
0.4
%
Carlyle Global Market Strategies CLO 2016-3, Ltd.
Structured Finance
Subordinated Structured Note
8/9/2016
Residual Interest, current yield 11.48%
—
7/20/2034
32,200
32,932
27,521
0.7
%
(5)(14)
32,932
27,521
0.7
%
CCS-CMGC Holdings, Inc.
Health Care Providers & Services
First Lien Term Loan
5/13/2019
5.60% (1ML+ 5.50%)
—
10/1/2025
9,526
9,422
9,526
0.2
%
(3)(8)(10)
Second Lien Term Loan
9/25/2018
9.10% (1ML+ 9.00%)
—
10/1/2026
37,000
36,532
37,000
0.9
%
(3)(8)(10)
45,954
46,526
1.1
%
Cent CLO 21 Limited
Structured Finance
Subordinated Structured Note
5/15/2014
Residual Interest, current yield 11.63%
—
7/29/2030
49,552
39,865
30,885
0.8
%
(5)(14)
39,865
30,885
0.8
%
CIFC Funding 2013-III-R, Ltd.
Structured Finance
Subordinated Structured Note
8/2/2013
Residual Interest, current yield 13.87%
—
4/24/2031
44,100
29,312
20,974
0.5
%
(5)(14)
29,312
20,974
0.5
%
CIFC Funding 2013-IV, Ltd.
Structured Finance
Subordinated Structured Note
10/22/2013
Residual Interest, current yield 15.99%
—
4/28/2031
45,500
32,985
30,202
0.8
%
(5)(14)
32,985
30,202
0.8
%
CIFC Funding 2014-IV-R, Ltd.
Structured Finance
Subordinated Structured Note
8/5/2014
Residual Interest, current yield 10.75%
—
10/17/2030
44,467
30,604
22,322
0.6
%
(5)(14)
30,604
22,322
0.6
%
CIFC Funding 2016-I, Ltd.
Structured Finance
Subordinated Structured Note
12/9/2016
Residual Interest, current yield 11.69%
—
10/21/2031
34,000
30,275
28,829
0.7
%
(5)(14)
30,275
28,829
0.7
%
Cinedigm DC Holdings, LLC
Entertainment
First Lien Term Loan
2/28/2013
11.00% (3ML+ 9.00%) plus 2.50% PIK
2.00
3/31/2022
3,031
2,981
3,031
0.1
%
(10)(39)
2,981
3,031
0.1
%
Collections Acquisition Company, Inc.
Diversified Financial Services
First Lien Term Loan
12/3/2019
10.15% (3ML+ 7.65%)
2.50
6/3/2024
30,165
30,165
30,165
0.8
%
(3)(10)
30,165
30,165
0.8
%
Columbia Cent CLO 27 Limited
Structured Finance
Subordinated Structured Note
12/18/2013
Residual Interest, current yield 3.38%
—
10/25/2028
40,275
22,044
19,078
0.5
%
(5)(14)
22,044
19,078
0.5
%
Curo Group Holdings Corp.
Consumer Finance
Second Lien Term Loan
7/30/2020
0.0825
—
9/1/2025
14,621
12,525
15,188
0.4
%
(14)(47)
12,525
15,188
0.4
%
Digital Room, LLC
Commercial Services & Supplies
First Lien Term Loan
5/14/2019
5.20% (6ML+ 5.00%)
—
5/21/2026
9,800
9,718
9,800
0.2
%
(3)(8)(10)
Second Lien Term Loan
5/14/2019
9.20% (6ML+ 9.00%)
—
5/21/2027
70,000
70,000
70,000
1.8
%
(3)(8)(10)
79,718
79,800
2.0
%
Dunn Paper, Inc.
Paper & Forest Products
First Lien Term Loan
11/18/2019
6.25% (1ML+ 5.25%)
1.00
8/26/2022
4,468
4,418
4,468
0.1
%
(3)(8)(10)
Second Lien Term Loan
8/26/2016
10.25% (1ML+ 9.25%)
1.00
8/26/2023
11,500
11,429
11,347
0.3
%
(3)(8)(10)
15,847
15,815
0.4
%
Easy Gardener Products, Inc.
Household Durables
Third Lien Term Loan
6/11/2020
10.25% (3ML+ 10.00%)
0.25
9/30/2024
3,950
3,950
3,950
0.1
%
(10)
Class A Units of EZG Holdings, LLC (200 units)
6/11/2020
—
N/A
—
313
781
—
%
(16)
Class B Units of EZG Holdings, LLC (12,525 units)
6/11/2020
—
N/A
—
1,688
5,043
0.1
%
(16)
5,951
9,774
0.2
%
Edmentum (22)
Diversified Consumer Services
Escrow Receivable
12/11/2020
—
N/A
—
—
—
—
%
(16)
—
—
—
%
See notes to consolidated financial statements.
23
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Engine Group, Inc. (7)
Media
First Lien Term Loan
11/17/2020
5.75% (1ML+ 4.75%)
1.00
11/17/2023
$
12,229
$
12,229
$
11,255
0.3
%
(8)(10)
Class B Common Units (1,039,554 units)
11/17/2020
—
N/A
—
26,991
707
—
%
(8)
39,220
11,962
0.3
%
Engineered Machinery Holdings, Inc.
Machinery
Incremental Amendment No. 2 Second Lien Term Loan
5/6/2021
7.25% (3ML+ 6.50%)
0.75
5/21/2029
5,000
4,976
4,973
0.1
%
(3)(8)(10)
4,976
4,973
0.1
%
Enseo Acquisition, Inc.
IT Services
First Lien Revolving Line of Credit - $5,000 Commitment
6/2/2021
9.00% (1ML+ 8.00%)
1.00
10/4/2021
—
—
—
—
%
(10)(15)
First Lien Term Loan
6/2/2021
9.00% (1ML+ 8.00%)
1.00
6/2/2026
55,000
55,000
55,000
1.4
%
(3)(10)
55,000
55,000
1.4
%
EXC Holdings III Corp
Technology Hardware, Storage & Peripherals
Second Lien Term Loan
11/17/2017
8.50% (3ML+ 7.50%)
1.00
12/1/2025
12,500
12,431
12,500
0.3
%
(3)(8)(10)
12,431
12,500
0.3
%
Eze Castle Integration, Inc. (f/k/a/ H.I.G. ECI Merger Sub, Inc.)
IT Services
First Lien Delayed Draw Term Loan - $1,786 Commitment
7/15/2020
10.00% (1ML+ 8.50%)
1.50
7/15/2025
—
—
—
—
%
(10)(15)
First Lien Term Loan
7/15/2020
10.00% (1ML+ 8.50%)
1.50
7/15/2025
47,222
47,222
47,222
1.2
%
(3)(10)
47,222
47,222
1.2
%
First Brands Group
Auto Components
First Lien Term Loan
3/24/2021
6.00% (1ML+ 5.00%)
1.00
3/30/2027
16,750
16,597
16,750
0.4
%
(3)(8)(10)
Second Lien Term Loan
3/24/2021
9.50% (1ML+ 8.50%)
1.00
3/30/2028
32,000
31,401
32,000
0.8
%
(3)(8)(10)
47,998
48,750
1.2
%
Galaxy XV CLO, Ltd.
Structured Finance
Subordinated Structured Note
2/13/2013
Residual Interest, current yield 12.98%
—
10/15/2030
50,525
35,486
26,987
0.7
%
(5)(14)
35,486
26,987
0.7
%
Galaxy XXVII CLO, Ltd.
Structured Finance
Subordinated Structured Note
9/30/2013
Residual Interest, current yield 13.22%
—
5/16/2031
24,575
17,050
12,121
0.3
%
(5)(14)
17,050
12,121
0.3
%
Galaxy XXVIII CLO, Ltd.
Structured Finance
Subordinated Structured Note
5/30/2014
Residual Interest, current yield 10.69%
—
7/15/2031
39,905
29,231
17,306
0.4
%
(5)(14)
29,231
17,306
0.4
%
GEON Performance Solutions, LLC
Chemicals
First Lien Revolving Line of Credit - $3,621 Commitment
12/12/2019
7.88% (2ML+ 6.25%)
1.63
10/25/2024
—
—
—
—
%
(10)(15)
First Lien Term Loan
12/12/2019
7.88% (2ML+ 6.25%)
1.63
10/25/2024
28,863
28,745
28,863
0.7
%
(3)(10)
28,745
28,863
0.7
%
Global Tel*Link Corporation
Diversified Telecommunication Services
First Lien Term Loan
8/7/2019
4.35% (1ML+ 4.25%)
—
11/29/2025
9,728
9,439
9,728
0.2
%
(3)(8)(10)
Second Lien Term Loan
11/20/2018
8.35% (1ML+ 8.25%)
—
11/29/2026
40,170
39,515
40,170
1.0
%
(3)(8)(10)
48,954
49,898
1.2
%
GlobalTranz Enterprises, Inc.
Air Freight & Logistics
Second Lien Term Loan
5/15/2019
8.35% (1ML+ 8.25%)
—
5/15/2027
12,500
12,500
12,500
0.3
%
(3)(8)(10)
12,500
12,500
0.3
%
Halcyon Loan Advisors Funding 2012-1 Ltd.
Structured Finance
Subordinated Structured Note
8/7/2012
Residual Interest, current yield 0.00%
—
8/15/2023
23,188
3,704
22
—
%
(5)(14)(17)
3,704
22
—
%
Halcyon Loan Advisors Funding 2013-1 Ltd.
Structured Finance
Subordinated Structured Note
3/8/2013
Residual Interest, current yield 0.00%
—
4/15/2025
40,400
19,984
—
—
%
(5)(14)(17)
19,984
—
—
%
See notes to consolidated financial statements.
24
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Halcyon Loan Advisors Funding 2014-1 Ltd.
Structured Finance
Subordinated Structured Note
2/7/2014
Residual Interest, current yield 0.00%
—
4/20/2026
$
24,500
$
11,822
$
—
—
%
(5)(14)(17)
11,822
—
—
%
Halcyon Loan Advisors Funding 2014-2 Ltd.
Structured Finance
Subordinated Structured Note
4/14/2014
Residual Interest, current yield 0.00%
—
4/28/2025
41,164
21,322
—
—
%
(5)(14)(17)
21,322
—
—
%
Halcyon Loan Advisors Funding 2015-3 Ltd.
Structured Finance
Subordinated Structured Note
7/23/2015
Residual Interest, current yield 0.00%
—
10/18/2027
39,598
29,557
4,825
0.1
%
(5)(14)(17)
29,557
4,825
0.1
%
HarbourView CLO VII-R, Ltd.
Structured Finance
Subordinated Structured Note
6/5/2015
Residual Interest, current yield 1.09%
—
7/18/2031
19,025
13,024
5,180
0.1
%
(5)(14)
13,024
5,180
0.1
%
Help/Systems Holdings, Inc.
Software
Second Lien Term Loan
11/14/2019
7.50% (3ML+ 6.75%)
0.75
11/19/2027
22,500
22,240
22,500
0.6
%
(3)(8)(10)
22,240
22,500
0.6
%
Interventional Management Services, LLC
Health Care Providers & Services
First Lien Revolving Line of Credit - $5,000 Commitment
2/22/2021
9.50% (3ML+ 8.50%)
1.00
2/22/2025
2,000
2,000
2,000
0.1
%
(10)(15)
First Lien Term Loan
2/22/2021
9.50% (3ML+ 8.50%)
1.00
2/20/2026
69,795
69,795
69,795
1.8
%
(3)(10)
71,795
71,795
1.9
%
Jefferson Mill CLO Ltd.
Structured Finance
Subordinated Structured Note
6/26/2015
Residual Interest, current yield 9.31%
—
10/20/2031
23,594
19,858
13,083
0.3
%
(5)(14)
19,858
13,083
0.3
%
K&N Parent, Inc.
Auto Components
First Lien Term Loan
2/20/2020
5.75% (3ML+ 4.75%)
1.00
10/20/2023
1,883
1,710
1,883
—
%
(3)(8)(10)
Second Lien Term Loan
10/19/2016
9.75% (3ML+ 8.75%)
1.00
10/21/2024
25,887
25,615
25,887
0.7
%
(3)(8)(10)
27,325
27,770
0.7
%
Keystone Acquisition Corp. (4)
Health Care Providers & Services
Second Lien Term Loan
5/10/2017
10.25% (3ML+ 9.25%)
1.00
5/1/2025
50,000
50,000
50,000
1.3
%
(3)(8)(10)
50,000
50,000
1.3
%
KM2 Solutions LLC
IT Services
First Lien Term Loan
12/17/2020
9.00% (3ML+ 8.00%)
1.00
12/17/2025
24,875
24,875
24,875
0.6
%
(3)(10)
24,875
24,875
0.6
%
LCM XIV Ltd.
Structured Finance
Subordinated Structured Note
6/25/2013
Residual Interest, current yield 10.26%
—
7/21/2031
49,934
28,910
20,281
0.5
%
(5)(14)
28,910
20,281
0.5
%
Legility, LLC
Professional Services
First Lien Term Loan
2/25/2020
7.00% (6ML+ 6.00%)
1.00
12/17/2025
18,963
18,661
18,963
0.5
%
(3)(8)(10)
First Lien Term Loan
2/25/2020
7.00% (1ML+ 6.00%)
1.00
12/17/2025
387
381
387
—
%
(3)(8)(10)
19,042
19,350
0.5
%
LGC US FINCO, LLC
Machinery
First Lien Term Loan
1/17/2020
8.50% (1ML+ 7.50%)
1.00
12/20/2025
29,100
28,422
28,049
0.7
%
(3)(8)(10)
28,422
28,049
0.7
%
Maverick Healthcare Equity, LLC
Health Care Providers & Services
Preferred Units (1,250,000 units)
10/31/2007
—
N/A
—
—
—
—
%
(16)
Class A Common Units (1,250,000 units)
10/31/2007
—
N/A
—
—
—
—
%
(16)
—
—
—
%
See notes to consolidated financial statements.
25
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Medusind Acquisition, Inc. (19)
Health Care Providers & Services
First Lien Term Loan
9/30/2019
9.00% (3ML+ 8.00%)
1.00
4/8/2024
$
24,136
$
23,906
$
24,136
0.6
%
(3)(10)
23,906
24,136
0.6
%
Mountain View CLO 2013-I Ltd.
Structured Finance
Subordinated Structured Note
4/17/2013
Residual Interest, current yield 5.79%
—
10/15/2030
43,650
28,800
16,135
0.4
%
(5)(14)
28,800
16,135
0.4
%
Mountain View CLO IX Ltd.
Structured Finance
Subordinated Structured Note
5/13/2015
Residual Interest, current yield 14.82%
—
7/15/2031
47,830
28,628
26,301
0.7
%
(5)(14)
28,628
26,301
0.7
%
Octagon Investment Partners XV, Ltd.
Structured Finance
Subordinated Structured Note
1/24/2013
Residual Interest, current yield 10.32%
—
7/19/2030
42,064
32,164
25,683
0.7
%
(5)(14)
32,164
25,683
0.7
%
Octagon Investment Partners 18-R Ltd.
Structured Finance
Subordinated Structured Note
8/12/2015
Residual Interest, current yield 16.44%
—
4/16/2031
46,016
24,976
18,289
0.5
%
(5)(14)
24,976
18,289
0.5
%
OneTouchPoint Corp
Professional Services
First Lien Term Loan
2/19/2021
9.00% (3ML+ 8.00%)
1.00
2/19/2026
40,298
40,298
40,298
1.0
%
(3)(10)
40,298
40,298
1.0
%
Orva Buyer, LLC
Specialty Retail
First Lien Term Loan
12/23/2020
9.50% (1ML+ 7.50%)
2.00
12/23/2025
40,095
40,095
40,095
1.0
%
(3)(10)
40,095
40,095
1.0
%
Pearl Intermediate Parent LLC
Health Care Providers & Services
Second Lien Term Loan
2/1/2018
6.35% (1ML+ 6.25%)
—
2/15/2026
5,000
4,985
5,000
0.1
%
(3)(8)(10)
4,985
5,000
0.1
%
PeopleConnect Holdings, LLC (11)
Interactive Media & Services
First Lien Revolving Line of Credit - $8,918 Commitment
1/22/2020
10.00% (1ML+ 8.25%)
1.75
1/22/2025
—
—
—
—
%
(10)(15)
First Lien Term Loan
1/22/2020
10.00% (3ML+ 8.25%)
1.75
1/22/2025
180,127
180,127
180,127
4.6
%
(3)(10)
180,127
180,127
4.6
%
PlayPower, Inc.
Leisure Products
First Lien Term Loan
5/7/2019
5.65% (3ML+ 5.50%)
—
5/10/2026
5,906
5,860
5,906
0.1
%
(3)(8)(10)
5,860
5,906
0.1
%
Redstone Holdco 2 LP (49)
IT Services
Second Lien Delayed Draw Term Loan - $18,200 Commitment
4/16/2021
8.50% (3ML+ 7.75%)
0.75
4/27/2029
—
—
—
—
%
(8)(10)(15)
Second Lien Term Loan
4/16/2021
8.50% (3ML+ 7.75%)
0.75
4/27/2029
31,778
31,233
31,490
0.8
%
(3)(8)(10)
31,233
31,490
0.8
%
Research Now Group, Inc. & Survey Sampling International LLC
Professional Services
First Lien Term Loan
12/8/2017
6.50% (6ML+ 5.50%)
1.00
12/20/2024
9,650
9,383
9,650
0.2
%
(3)(8)(10)
Second Lien Term Loan
12/8/2017
10.50% (6ML+ 9.50%)
1.00
12/20/2025
50,000
48,057
50,000
1.3
%
(3)(8)(10)
57,440
59,650
1.5
%
Rising Tide Holdings, Inc.
Diversified Consumer Services
Second Lien Term Loan
5/26/2021
9.00% (1ML+ 8.25%)
0.75
6/1/2029
23,000
22,659
22,711
0.6
%
(8)(10)
22,659
22,711
0.6
%
RME Group Holding Company
Media
First Lien Term Loan A
5/4/2017
8.00% (3ML+ 7.00%)
1.00
5/4/2022
26,896
26,896
26,896
0.7
%
(3)(10)
First Lien Term Loan B
5/4/2017
13.00% (3ML+ 12.00%)
1.00
5/4/2022
22,099
22,099
22,073
0.6
%
(3)(10)
48,995
48,969
1.3
%
Romark WM-R Ltd.
Structured Finance
Subordinated Structured Note
4/11/2014
Residual Interest, current yield 9.08%
—
4/21/2031
27,725
22,883
15,346
0.4
%
(5)(14)
22,883
15,346
0.4
%
Rosa Mexicano
Hotels, Restaurants & Leisure
First Lien Revolving Line of Credit - $500 Commitment
3/29/2018
8.75% (3ML+ 7.50%)
1.25
3/29/2023
524
524
505
—
%
(10)(15)(39)
First Lien Term Loan
3/29/2018
8.75% (3ML+ 7.50%)
1.25
3/29/2023
23,978
23,978
23,119
0.6
%
(10)(39)
24,502
23,624
0.6
%
See notes to consolidated financial statements.
26
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
Securus Technologies Holdings, Inc.
Communications Equipment
First Lien Term Loan
8/2/2019
5.50% (3ML+ 4.50%)
1.00
11/1/2024
$
9,797
$
9,151
$
9,556
0.2
%
(8)(10)
Second Lien Term Loan
6/20/2017
9.25% (3ML+ 8.25%)
1.00
11/1/2025
50,662
50,558
49,325
1.3
%
(3)(8)(10)
59,709
58,881
1.5
%
SEOTownCenter, Inc.
IT Services
First Lien Term Loan A
4/10/2018
9.50% (3ML+ 7.50%)
2.00
4/7/2023
24,104
24,104
24,104
0.6
%
(3)(10)
First Lien Term Loan B
4/10/2018
14.50% (3ML+ 12.50%)
2.00
4/7/2023
19,027
19,027
19,027
0.5
%
(3)(10)
43,131
43,131
1.1
%
Shearer’s Foods, LLC
Food Products
Second Lien Term Loan
9/15/2020
8.75% (1ML+ 7.75%)
1.00
9/23/2028
5,000
4,909
5,000
0.1
%
(3)(8)(10)
4,909
5,000
0.1
%
Shutterfly, Inc.
Internet & Direct Marketing Retail
First Lien Term Loan
11/14/2019
7.00% (1ML+ 6.00%)
1.00
9/25/2026
16,019
14,582
16,019
0.4
%
(3)(8)(10)(47)
14,582
16,019
0.4
%
Sorenson Communications, LLC
Diversified Telecommunication Services
First Lien Term Loan
3/12/2021
6.25% (3ML+ 5.50%)
0.75
3/17/2026
17,550
17,379
17,550
0.4
%
(3)(8)(10)
17,379
17,550
0.4
%
Southern Veterinary Partners
Health Care Providers & Services
Second Lien Term Loan
10/2/2020
8.75% (6ML+ 7.75%)
1.00
10/5/2028
8,000
7,927
8,000
0.2
%
(3)(8)(10)
7,927
8,000
0.2
%
Spectrum Holdings III Corp
Health Care Equipment & Supplies
Second Lien Term Loan
1/26/2018
8.00% (6ML+ 7.00%)
1.00
1/31/2026
7,500
7,478
6,721
0.2
%
(3)(8)(10)
7,478
6,721
0.2
%
Staples, Inc.
Distributors
First Lien Term Loan
11/18/2019
5.18% (3ML+ 5.00%)
—
4/16/2026
8,864
8,797
8,687
0.2
%
(3)(8)(10)(47)
8,797
8,687
0.2
%
Strategic Materials
Household Durables
Second Lien Term Loan
10/27/2017
8.75% (3ML+ 7.75%)
1.00
11/1/2025
7,000
6,962
5,629
0.1
%
(3)(8)(10)
6,962
5,629
0.1
%
Stryker Energy, LLC
Energy Equipment & Services
Overriding Royalty Interest
12/4/2006
—
N/A
—
—
—
—
%
(13)(16)
—
—
—
%
Sudbury Mill CLO Ltd.
Structured Finance
Subordinated Structured Note
11/14/2013
Residual Interest, current yield 0.00%
—
1/19/2026
28,200
13,875
6,868
0.2
%
(5)(14)(17)
13,875
6,868
0.2
%
Symphony CLO XIV, Ltd.
Structured Finance
Subordinated Structured Note
5/6/2014
Residual Interest, current yield 0.00%
—
7/14/2026
49,249
26,645
15,846
0.4
%
(5)(14)(17)
26,645
15,846
0.4
%
Symphony CLO XV, Ltd.
Structured Finance
Subordinated Structured Note
10/17/2014
Residual Interest, current yield 11.95%
—
1/19/2032
63,830
45,451
27,674
0.7
%
(5)(14)
45,451
27,674
0.7
%
The Octave Music Group, Inc.
Entertainment
First Lien Term Loan
2/26/2020
6.25% (1ML+ 5.25%) plus 0.75% PIK
1.00
5/29/2025
37,897
37,604
37,897
1.0
%
(3)(8)(10)(39)
37,604
37,897
1.0
%
Town & Country Holdings, Inc.
Distributors
First Lien Term Loan
1/26/2018
10.00% (3ML+ 8.50%)
1.50
1/26/2023
160,145
160,145
160,145
4.1
%
(3)(10)
160,145
160,145
4.1
%
See notes to consolidated financial statements.
27
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS AS OF JUNE 30, 2021
(in thousands, except share data)
June 30, 2021
Portfolio Company
Industry
Investments(1)(38)
Acquisition Date(44)
Coupon/Yield
Floor
Legal Maturity
Principal Value
Amortized Cost
Fair Value(2)
% of Net Assets
LEVEL 3 PORTFOLIO INVESTMENTS
Non-Control/Non-Affiliate Investments (less than 5.00% voting control)
TPS, LLC
Machinery
First Lien Term Loan
11/30/2020
10.00% (3ML+ 9.00%) plus 1.50% PIK
1.00
11/30/2025
$
28,967
$
28,967
$
28,967
0.7
%
(3)(10)(39)
28,967
28,967
0.7
%
Transplace Holdings, Inc.
Transportation Infrastructure
Second Lien Term Loan
10/2/2017
9.75% (6ML+ 8.75%)
1.00
10/6/2025
30,900
30,384
30,900
0.8
%
(3)(8)(10)
30,384
30,900
0.8
%
United Sporting Companies, Inc. (18)
Distributors
Second Lien Term Loan
9/28/2012
13.25% (1ML+ 11.00%) plus 2.00% PIK
2.25
11/16/2019
144,692
103,730
6,936
0.2
%
(9)(10)
103,730
6,936
0.2
%
Universal Fiber Systems, LLC
Textiles, Apparel & Luxury Goods
Second Lien Term Loan
10/2/2015
10.50% (1ML+ 9.50%)
1.00
10/2/2022
37,000
36,868
36,515
0.9
%
(3)(8)(10)
36,868
36,515
0.9
%
Upstream Newco, Inc.
Health Care Providers & Services
First Lien Term Loan
11/20/2019
4.60% (1ML+ 4.50%)
—
11/20/2026
8,147
8,114
8,147
0.2
%
(3)(8)(10)
Second Lien Term Loan
11/20/2019
8.60% (1ML+ 8.50%)
—
11/20/2027
22,000
21,835
22,000
0.6
%
(3)(8)(10)
29,949
30,147
0.8
%
USG Intermediate, LLC
Leisure Products
First Lien Revolving Line of Credit - $3,000 Commitment
4/15/2015
10.25% (1ML+ 9.25%)
1.00
8/24/2024
1,000
1,000
1,000
—
%
(10)(15)
First Lien Term Loan B
4/15/2015
12.75% (1ML+ 11.75%)
1.00
8/24/2024
13,381
13,381
13,381
0.3
%
(3)(10)
Equity
4/15/2015
—
N/A
—
1
—
—
%
(16)
14,382
14,381
0.3
%
Venio LLC (48)
Professional Services
First Lien Term Loan
2/19/2014
4.00% plus 10.00% PIK (3ML + 7.50%)
2.50
2/19/2020
15,235
15,235
12,760
0.3
%
(10)(39)
15,235
12,760
0.3
%
Vision Solutions, Inc. (29)
IT Services
Second Lien Term Loan
4/23/2021
8.00% (3ML+ 7.25%)
0.75
4/23/2029
60,000
59,438
60,000
1.5
%
(3)(8)(10)
59,438
60,000
1.5
%
Voya CLO 2012-4, Ltd.
Structured Finance
Subordinated Structured Note
11/5/2012
Residual Interest, current yield 9.72%
—
10/15/2030
40,612
30,665
24,830
0.6
%
(5)(14)
30,665
24,830
0.6
%
Voya CLO 2014-1, Ltd.
Structured Finance
Subordinated Structured Note
2/5/2014
Residual Interest, current yield 8.31%
—
4/18/2031
40,772
30,555
18,151
0.5
%
(5)(14)
30,555
18,151
0.5
%
Voya CLO 2016-3, Ltd.
Structured Finance
Subordinated Structured Note
9/30/2016
Residual Interest, current yield 11.32%
—
10/20/2031
28,100
25,390
20,221
0.5
%
(5)(14)
25,390
20,221
0.5
%
Voya CLO 2017-3, Ltd.
Structured Finance
Subordinated Structured Note
6/13/2017
Residual Interest, current yield 13.22%
—
4/20/2034
44,884
49,537
42,859
1.1
%
(5)(14)
49,537
42,859
1.1
%
VT Topco, Inc.
Commercial Services & Supplies
Second Lien Term Loan
8/14/2018
7.10% (1ML+ 7.00%)
—
8/17/2026
7,000
6,978
6,882
0.2
%
(3)(8)(10)
6,978
6,882
0.2
%
Total Non-Control/Non-Affiliate Investments (Level 3)
$
3,372,750
$
2,925,327
74.2
%
Total Portfolio Investments (Level 3)
$
6,058,124
$
6,201,778
157.2
%
See notes to consolidated financial statements.
28
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021
(1)The terms “Prospect,” “the Company,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise. The securities in which Prospect has invested were acquired in transactions that were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”). These securities may be resold only in transactions that are exempt from registration under the Securities Act.
(2)Fair value is determined by or under the direction of our Board of Directors. Unless otherwise indicated by endnote 47 below, all of our investments are valued using significant unobservable inputs. In accordance with ASC 820, such investments are classified as Level 3 within the fair value hierarchy. See Notes 2 and 3 within the accompanying notes to consolidated financial statements for further discussion.
(3)Security, or a portion thereof, is held by Prospect Capital Funding LLC (“PCF”), our wholly owned subsidiary and a bankruptcy remote special purpose entity, and is pledged as collateral for the Revolving Credit Facility and such security is not available as collateral to our general creditors (see Note 4). The fair values of the investments held by PCF at March 31, 2022 and June 30, 2021 were $2,533,667 and $1,797,733, respectively, representing 34.1% and 29.0% of our total investments, respectively.
(4)Keystone Acquisition Corp. is the parent borrower on the second lien term loan. Other joint borrowers on this debt investment include Keystone Peer Review Organization, Inc., KEPRO Acquisitions, Inc., APS Healthcare Bethesda, Inc., Ohio KEPRO, Inc., and APS Healthcare Quality Review, Inc.
(5)This investment is in the equity class of the collateralized loan obligation (“CLO”) security, which is referred to as “Subordinated Structured Note,” or “SSN”. The SSN investments are entitled to recurring distributions which are generally equal to the excess cash flow generated from the underlying investments after payment of the contractual payments to debt holders and fund expenses. The current estimated yield, calculated using amortized cost, is based on the current projections of this excess cash flow taking into account assumptions which have been made regarding expected prepayments, losses and future reinvestment rates. These assumptions are periodically reviewed and adjusted. Ultimately, the actual yield may be higher or lower than the estimated yield if actual results differ from those used for the assumptions.
(6)During the year ended June 30, 2020, we increased our investment in PGX Holdings, Inc. (“PGX”) through a new 1.5 Lien Term Loan in the aggregate principal amount of $1,981. Attached to the incremental term loan investment were shares of common stock representing an 11.4% equity interest in PGX. As a result, our investment in PGX was transferred from non-control/non-affiliate to affiliate classification as of June 30, 2020. On July 21, 2021, we funded total commitments of $202,931, comprised of a $49,000 first lien senior secured floating rate term loan and a $153,931 second lien senior secured floating rate term loan, to support the refinancing of PGX. In connection with the refinancing, our $47,773 first lien senior secured term loan, $18,164 1.5 lien senior secured term loan and $122,271 second lien senior secured term loan outstanding with PGX were fully repaid at par.
(7)Engine Group, Inc., EMX Digital, Inc. (f/k/a Clearstream.TV, Inc.), and Engine International, Inc., are joint borrowers on the first lien term loan.
(8)Syndicated investment which was originated by a financial institution and broadly distributed.
(9)Investment on non-accrual status as of the reporting date (See Note 2).
(10)Certain variable rate securities in our portfolio bear interest at a rate determined by a publicly disclosed base rate plus a basis point spread. The 1-Month LIBOR, or “1ML”, was 0.45% as of March 31, 2022 and 0.10% as of June 30, 2021. The 2-Month LIBOR, or “2ML”, was 0.13% as of June 30, 2021. The 3-Month LIBOR, or “3ML”, was 0.96% as of March 31, 2022 and 0.15% as of June 30, 2021. The 6-Month LIBOR, or “6ML”, was 1.47% as of March 31, 2022 and 0.16% as of June 30, 2021. The 12-Month LIBOR, or “12ML”, was 0.25% as of June 30, 2021. The 1-Month Secured Overnight Financing Rate or “1MS”, was 0.30% as of March 31, 2022. The 3-Month Secured Overnight Financing Rate or “3MS”, was 0.68% as of March 31, 2022.
(11)PeopleConnect Holdings, Inc. and Pubrec Holdings, Inc. are joint borrowers.
(12)The consolidated revenue interest is equal to the lesser of (i) 2.0% of consolidated revenue for the twelve-month period ending on the last day of the prior fiscal quarter (or portion thereof) and (ii) 25% of the amount of interest accrued on the Notes at the cash interest rate for such fiscal quarter (or portion thereof).
(13)The overriding royalty interests held receive payments at the stated rates based upon operations of the borrower.
See notes to consolidated financial statements.
29
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(14)Investment has been designated as an investment not “qualifying” under Section 55(a) of the Investment Company Act of 1940 (the “1940 Act”). Under the 1940 Act, we may not acquire any non-qualifying asset unless, at the time such acquisition is made, qualifying assets represent at least 70% of our total assets. As of March 31, 2022 and June 30, 2021, our qualifying assets, as a percentage of total assets, stood at 79.22% and 76.31%, respectively. We monitor the status of these assets on an ongoing basis.
(15)Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 7.25%. As of March 31, 2022 and June 30, 2021, we had $43,351 and $67,385, respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio companies.
(16)Represents non-income producing security that has not paid a dividend in the year preceding the reporting date.
(17)The effective yield has been estimated to be 0% as expected future cash flows are anticipated to not be sufficient to repay the investment at cost. If the expected investment proceeds increase, there is a potential for future investment income from the investment. Distributions, once received, will be recognized as return of capital, and when called, any remaining unamortized investment costs will be written off if the actual distributions are less than the amortized investment cost. To the extent that the cost basis of the SSN is fully recovered, any future distributions will be recorded as realized gains.
(18)Ellett Brothers, LLC, Evans Sports, Inc., Jerry’s Sports, Inc., Simmons Gun Specialties, Inc., Bonitz Brothers, Inc., and Outdoor Sports Headquarters, Inc. are joint borrowers on the second lien term loan. United Sporting Companies, Inc. (“USC”) is a parent guarantor of this debt investment, and is 100% owned by SportCo Holdings, Inc. (“SportCo”). In June 2019, USC filed for Chapter 11 bankruptcy and began liquidating its remaining assets.
(19)Medusind Acquisition, Inc., Medusind Intermediate, Inc., Medusind Solutions Inc. and Medusind Inc. are joint borrowers.
(20)CP Holdings of Delaware LLC (“CP Holdings”), a consolidated entity in which we own 100% of the membership interests, owns 99.8% of CP Energy Services Inc. (“CP Energy”) as of March 31, 2022 and June 30, 2021. CP Energy owns directly or indirectly 100% of each of CP Well Testing, LLC; Wright Foster Disposals, LLC; Foster Testing Co., Inc.; ProHaul Transports, LLC; and Wright Trucking, Inc. We report CP Energy as a separate controlled company. In June 2019, CP Energy purchased a controlling interest in the common equity of Spartan Energy Holdings, Inc. (“Spartan Holdings”), which owns 100% of Spartan Energy Services, LLC (“Spartan”), a portfolio company of Prospect with $26,258 in first lien term loans (the “Spartan Term Loans”) due to us as of March 31, 2022. As a result of CP Energy’s purchase, and given Prospect’s controlling interest in CP Energy, our Spartan Term Loans are presented as control investments under CP Energy beginning June 30, 2019. Spartan remains the direct borrower and guarantor to Prospect for the Spartan Term Loans. In September 2020, we made a new $26,193 Series A preferred stock investment in Spartan Energy Holdings, Inc., which equates to 100% of the Series A non-voting non-convertible preferred stock outstanding. In September 2020, Spartan Energy Services, LLC fully repaid the $26,193 Senior Secured Term Loan B receivable to us at par. We recorded a realized gain of $2,832 in our Consolidated Statement of Operations for the quarter ended September 30, 2020 as a result of this transaction.
(21)Credit Central Holdings of Delaware, LLC (“Credit Central Delaware”), a consolidated entity in which we own 100% of the membership interests, owns 99.01% of Credit Central Loan Company, LLC (f/k/a Credit Central Holdings, LLC (“Credit Central”)) as of March 31, 2022 and June 30, 2021, respectively. Credit Central owns 100% of each of Credit Central, LLC; Credit Central South, LLC; Credit Central of Texas, LLC; and Credit Central of Tennessee, LLC, the operating companies. We report Credit Central as a separate controlled company. Effective December 10, 2021, Credit Central’s term loan lenders were granted a first priority security interest on certain assets of Credit Central and our investment became classified as a First Lien Term Loan.
(22)Redstone Holdco 2 LP is the parent borrower on the second lien term loan. Redstone Buyer, LLC, Redstone Intermediate (Archer) HoldCo LLC, Redstone Intermediate (FRI) HoldCo LLC, Redstone Intermediate (NetWitness) HoldCo, LLC, and Redstone Intermediate (SecurID) HoldCo, LLC are joint borrowers on the Second Lien Term Loan.
(23)First Tower Holdings of Delaware LLC (“First Tower Delaware”), a consolidated entity in which we own 100% of the membership interests, owns 80.03% of First Tower Finance Company LLC (“First Tower Finance”), which owns 100% of First Tower, LLC, the operating company as of March 31, 2022 and June 30, 2021. We report First Tower Finance as a separate controlled company. Effective March 17, 2021, the First Tower, LLC lenders were granted a first priority security interest in First Tower Finance’s assets and our investment became classified as a First Lien Term Loan. Effective June 30, 2021, we increased our investment in our first lien term loan in the aggregate principal amount of $50,000 and that proceeds were returned to us as a distribution on our equity investment in First Tower, LLC.
See notes to consolidated financial statements.
30
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(24)Energy Solutions Holdings Inc., a consolidated entity in which we own 100% of the equity, owns 100% of Freedom Marine Solutions, LLC (“Freedom Marine”), which owns Vessel Company, LLC, Vessel Company II, LLC and Vessel Company III, LLC. We report Freedom Marine as a separate controlled company.
(25)MITY Holdings of Delaware Inc. (“MITY Delaware”), a consolidated entity in which we own 100% of the common stock, owns 100% of the equity of MITY, Inc. (f/k/a MITY Enterprises, Inc.) (“MITY”). MITY owns 100% of each of MITY-Lite, Inc. (“Mity-Lite”); Broda Enterprises USA, Inc.; and Broda Enterprises ULC (“Broda Canada”). We report MITY as a separate controlled company. Our subordinated unsecured note issued and outstanding to Broda Canada is denominated in Canadian Dollars (“CAD”). As of March 31, 2022 and June 30, 2021, the principal balance of this note was CAD 7,371. In accordance with ASC 830, Foreign Currency Matters (“ASC 830”), this note was remeasured into our functional currency, US Dollars (USD), and is presented on our Consolidated Schedule of Investments in USD. We formed a separate legal entity domiciled in the United States, MITY FSC, Inc., (“MITY FSC”) in which Prospect owns 100% of the equity. MITY FSC does not have material operations. This entity earns commission payments from MITY-Lite based on its sales to foreign customers, and distributes it to its shareholder.
(26)NPH Property Holdings, LLC (“NPH”), a consolidated entity in which we own 100% of the membership interests, owns 100% of the common equity of National Property REIT Corp. (“NPRC”) (f/k/a National Property Holdings Corp.), a property REIT which holds investments in several real estate properties. Additionally, NPRC invests in online consumer loans and rated secured structured notes through American Consumer Lending Limited (“ACLL”) and National General Lending Limited (“NGL”), respectively, its wholly owned subsidiaries. We report NPRC as a separate controlled company. See Note 3 for further discussion of the investments held by NPRC.
(27)Nationwide Acceptance Holdings LLC (“Nationwide Holdings”), a consolidated entity in which we own 100% of the membership interests, owns 94.48% of Nationwide Loan Company LLC, the operating company, as of March 31, 2022 and June 30, 2021. We report Nationwide Loan Company LLC as a separate controlled company. Prospect has a first priority security interest in the assets of Nationwide.
(28)NMMB Holdings, Inc. (“NMMB Holdings”), a consolidated entity in which we own 100% of the equity, owns 90.42% and 94.82% of the fully diluted equity of NMMB, Inc. (“NMMB”) as of March 31, 2022 and June 30, 2021, respectively. NMMB owns 100% of Refuel Agency, Inc., which owns 100% of Armed Forces Communications, Inc. We report NMMB as a separate controlled company.
(29)Vision Solutions, Inc. and Precisely Software Incorporate (f/k/a Syncsort Incorporated) are joint borrowers on the Second Lien Term Loan.
(30)Prospect owns 99.96% of the equity of USES Corp. as of March 31, 2022 and June 30, 2021.
(31)Valley Electric Holdings I, Inc., a consolidated entity in which we own 100% of the common stock, owns 100% of Valley Electric Holdings II, Inc. (“Valley Holdings II”), another consolidated entity. Valley Holdings II owns 94.99% of Valley Electric Company, Inc. (“Valley Electric”). Valley Electric owns 100% of the equity of VE Company, Inc., which owns 100% of the equity of Valley Electric Co. of Mt. Vernon, Inc. We report Valley Electric as a separate controlled company.
(32)As of March 31, 2022 and June 30, 2021, Prospect owns 8.57% of the equity in Encinitas Watches Holdco, LLC (f/k/a Nixon Holdco, LLC), the parent company of Nixon, Inc.
(33)Prospect owns 9.19% of the equity in Targus Cayman HoldCo Limited (“Targus”), the parent company of Targus International LLC (“Targus International”), as of March 31, 2022 and June 30, 2021.
(34)On December 10, 2018, UTP Holdings Group, Inc. (“UTP Holdings”) purchased all of the voting stock of Universal Turbine Parts, LLC (“UTP”) and appointed a new Board of Directors to UTP Holdings, consisting of three employees of the Investment Advisor. At the time UTP Holdings acquired UTP, UTP Holdings (f/k/a Harbortouch Holdings of Delaware) was a wholly-owned holding company controlled by Prospect and therefore Prospect’s investment in UTP became classified as a control investment during the year ended June 30, 2019.
(35)As of March 31, 2022 and June 30, 2021, the residual profit interest includes both (i) 8.33% of New TLA and TLD residual profit and (ii) 100% of TLC residual profits, with both calculated quarterly in arrears.
(36)Prospect owns 100% of the preferred equity of Pacific World Corporation (“Pacific World”), which represents a 99.97% ownership interest of Pacific World as of March 31, 2022 and June 30, 2021. As a result, Prospect’s investment in Pacific World is classified as a control investment.
See notes to consolidated financial statements.
31
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(37)The following shows the composition of our investment portfolio at cost by control designation, investment type and by industry as of March 31, 2022:
Industry
1st Lien Term Loan
2nd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Cost Total
Control Investments
Aerospace & Defense
$
53,209
$
—
$
—
$
—
$
55,581
$
108,790
Commercial Services & Supplies
118,567
—
—
7,200
27,349
153,116
Construction & Engineering
56,753
—
—
—
10,865
67,618
Consumer Finance
441,346
—
—
—
71,323
512,669
Diversified Consumer Services
—
—
—
—
2,378
2,378
Energy Equipment & Services
71,580
—
—
—
220,150
291,730
Equity Real Estate Investment Trusts (REITs)
562,286
—
—
—
11,830
574,116
Health Care Providers & Services
268,666
—
—
—
45,118
313,784
Machinery
33,622
—
—
—
6,866
40,488
Media
29,760
—
—
—
—
29,760
Online Lending
29,080
—
—
—
—
29,080
Personal Products
69,813
—
—
—
189,295
259,108
Trading Companies & Distributors
32,724
—
—
—
32,500
65,224
Structured Finance (A)
140,800
—
—
—
—
140,800
Total Control Investments
$
1,908,206
$
—
$
—
$
7,200
$
673,255
$
2,588,661
Affiliate Investments
Commercial Services & Supplies
$
3,680
$
—
$
—
$
—
$
10,303
$
13,983
Diversified Consumer Services
67,126
153,931
—
—
—
221,057
Textiles, Apparel & Luxury Goods
—
—
—
—
2,805
2,805
Total Affiliate Investments
$
70,806
$
153,931
$
—
$
—
$
13,108
$
237,845
Non-Control/Non-Affiliate Investments
Air Freight & Logistics
$
30,566
$
95,000
$
—
$
—
$
—
$
125,566
Auto Components
18,226
77,108
—
—
—
95,334
Building Products
—
35,000
—
—
—
35,000
Capital Markets
—
42,500
—
—
—
42,500
Commercial Services & Supplies
65,675
163,381
—
—
1,500
230,556
Communications Equipment
9,191
50,572
—
—
—
59,763
Consumer Finance
47,030
—
—
—
—
47,030
Distributors
171,904
103,730
—
—
—
275,634
Diversified Consumer Services
—
22,691
—
—
—
22,691
Diversified Financial Services
36,971
—
—
—
—
36,971
Diversified Telecommunication Services
25,539
121,694
—
—
—
147,233
Entertainment
21,857
—
—
—
—
21,857
Food Products
—
130,959
—
—
—
130,959
Health Care Equipment & Supplies
—
7,482
—
—
—
7,482
Health Care Providers & Services
186,754
135,353
—
—
1,546
323,653
Health Care Technology
64,838
—
—
—
—
64,838
Hotels, Restaurants & Leisure
23,514
—
—
—
—
23,514
Household Durables
86,953
29,758
—
—
2,001
118,712
Household Products
20,999
—
—
—
—
20,999
Insurance
—
21,952
—
—
—
21,952
Interactive Media & Services
242,681
—
—
—
—
242,681
Internet & Direct Marketing Retail
59,695
—
—
—
—
59,695
IT Services
178,007
108,704
—
—
—
286,711
Leisure Products
44,869
—
—
—
—
44,869
Machinery
58,597
9,980
—
—
—
68,577
Media
51,800
—
—
—
26,991
78,791
Paper & Forest Products
—
11,454
—
—
—
11,454
Professional Services
63,569
48,386
—
—
—
111,955
See notes to consolidated financial statements.
32
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
Industry
1st Lien Term Loan
2nd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Cost Total
Software
—
52,281
—
—
—
52,281
Technology Hardware, Storage & Peripherals
—
12,443
—
—
—
12,443
Textiles, Apparel & Luxury Goods
177,568
45,882
—
—
—
223,450
Structured Finance (A)
—
—
1,016,280
—
—
1,016,280
Total Non-Control/Non-Affiliate
$
1,686,803
$
1,326,310
$
1,016,280
$
—
$
32,038
$
4,061,431
Total Portfolio Investment Cost
$
3,665,815
$
1,480,241
$
1,016,280
$
7,200
$
718,401
$
6,887,937
The following table shows the composition of our investment portfolio at fair value by control designation, investment type and by industry as of March 31, 2022:
Industry
1st Lien Term Loan
2nd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Fair Value Total
Fair Value % of Net Assets Applicable to Common Stock
Control Investments
Aerospace & Defense
$
53,209
$
—
$
—
$
—
$
14,750
$
67,959
1.6
%
Commercial Services & Supplies
76,264
—
—
5,719
4,428
86,411
2.0
%
Construction & Engineering
56,753
—
—
—
91,614
148,367
3.5
%
Consumer Finance
443,446
—
—
—
338,180
781,626
18.5
%
Diversified Consumer Services
—
—
—
—
3,833
3,833
0.1
%
Energy Equipment & Services
71,580
—
—
—
58,819
130,399
3.1
%
Equity Real Estate Investment Trusts (REITs)
562,286
—
—
—
796,410
1,358,696
32.1
%
Health Care Providers & Services
268,666
—
—
—
141,091
409,757
9.7
%
Machinery
33,622
—
—
—
25,133
58,755
1.4
%
Media
29,760
—
—
—
50,508
80,268
1.9
%
Online Lending
29,080
—
—
—
—
29,080
0.7
%
Personal Products
56,787
—
—
—
—
56,787
1.3
%
Trading Companies & Distributors
25,767
—
—
—
—
25,767
0.6
%
Structured Finance (A)
140,800
—
—
—
—
140,800
3.3
%
Total Control Investments
$
1,848,020
$
—
$
—
$
5,719
$
1,524,766
$
3,378,505
79.8
%
Fair Value % of Net Assets
43.6
%
—
%
—
%
0.1
%
36.1
%
79.8
%
See notes to consolidated financial statements.
33
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
Industry
1st Lien Term Loan
2nd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Fair Value Total
Fair Value % of Net Assets Applicable to Common Stock
Affiliate Investments
Commercial Services & Supplies
$
3,680
$
—
$
—
$
—
$
15,256
$
18,936
0.4
%
Diversified Consumer Services
67,126
153,931
—
—
141,123
362,180
8.6
%
Textiles, Apparel & Luxury Goods
—
—
—
—
36,536
36,536
0.9
%
Total Affiliate Investments
$
70,806
$
153,931
$
—
$
—
$
192,915
$
417,652
9.9
%
Fair Value % of Net Assets
1.7
%
3.6
%
—
%
—
%
4.6
%
9.9
%
Non-Control/Non-Affiliate Investments
Air Freight & Logistics
$
30,566
$
95,000
$
—
$
—
$
—
$
125,566
3.0
%
Auto Components
18,158
69,524
—
—
—
87,682
2.1
%
Building Products
—
35,000
—
—
—
35,000
0.8
%
Capital Markets
—
42,500
—
—
—
42,500
1.0
%
Commercial Services & Supplies
65,604
163,693
—
—
1,535
230,832
5.4
%
Communications Equipment
9,489
50,007
—
—
—
59,496
1.4
%
Consumer Finance
41,128
—
—
—
—
41,128
1.0
%
Distributors
171,535
6,284
—
—
—
177,819
4.2
%
Diversified Consumer Services
—
23,000
—
—
—
23,000
0.5
%
Diversified Financial Services
36,971
—
—
—
—
36,971
0.9
%
Diversified Telecommunication Services
25,796
122,474
—
—
—
148,270
3.5
%
Entertainment
22,093
—
—
—
—
22,093
0.5
%
Food Products
—
128,983
—
—
—
128,983
3.0
%
Health Care Equipment & Supplies
—
6,900
—
—
—
6,900
0.2
%
Health Care Providers & Services
186,882
135,945
—
—
1,195
324,022
7.7
%
Health Care Technology
64,838
—
—
—
—
64,838
1.5
%
Hotels, Restaurants & Leisure
23,119
—
—
—
—
23,119
0.5
%
Household Durables
86,953
28,647
—
—
4,050
119,650
2.8
%
Household Products
20,999
—
—
—
—
20,999
0.5
%
Insurance
—
22,280
—
—
—
22,280
0.5
%
Interactive Media & Services
242,681
—
—
—
—
242,681
5.8
%
Internet & Direct Marketing Retail
59,298
—
—
—
—
59,298
1.4
%
IT Services
178,007
108,660
—
—
—
286,667
6.8
%
Leisure Products
44,705
—
—
—
—
44,705
1.1
%
Machinery
59,123
10,000
—
—
—
69,123
1.6
%
Media
51,677
—
—
—
294
51,971
1.2
%
Paper & Forest Products
—
9,457
—
—
—
9,457
0.2
%
Professional Services
61,368
50,000
—
—
—
111,368
2.6
%
Software
—
52,500
—
—
—
52,500
1.2
%
Technology Hardware, Storage & Peripherals
—
12,500
—
—
—
12,500
0.3
%
Textiles, Apparel & Luxury Goods
177,568
45,955
—
—
—
223,523
5.3
%
Structured Finance (A)
—
—
728,833
—
—
728,833
17.2
%
Total Non-Control/Non-Affiliate
$
1,678,558
$
1,219,309
$
728,833
$
—
$
7,074
$
3,633,774
85.7
%
Fair Value % of Net Assets
39.6
%
28.8
%
17.2
%
—
%
0.1
%
85.7
%
Total Portfolio
$
3,597,384
$
1,373,240
$
728,833
$
5,719
$
1,724,755
$
7,429,931
175.4
%
Fair Value % of Net Assets
84.9
%
32.4
%
17.2
%
0.1
%
40.8
%
175.4
%
(A) Our SSN investments do not have industry concentrations and as such have been separated in the tables above.
(B) Equity, unless specifically stated otherwise, includes our investments in preferred stock, common stock, membership interests, net profits interests, net operating income interests, net revenue interests, overriding royalty interests, escrows receivable, and warrants.
(38)The following table shows the composition of our investment portfolio at cost by control designation, investment type and by industry as of June 30, 2021:
See notes to consolidated financial statements.
34
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
Industry
1st Lien Term Loan
1.5 Lien Term Loan
2nd Lien Term Loan
3rd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Cost Total
Control Investments
Aerospace & Defense
$
75,406
$
—
$
—
$
—
$
—
$
—
$
22,738
$
98,144
Commercial Services & Supplies
114,184
—
—
—
—
7,200
27,349
148,733
Construction & Engineering
43,731
—
—
—
—
—
26,204
69,935
Consumer Finance
344,968
—
65,599
—
—
—
71,323
481,890
Diversified Consumer Services
—
—
—
—
—
—
2,378
2,378
Energy Equipment & Services
57,078
—
—
—
—
—
220,149
277,227
Equity Real Estate Investment Trusts (REITs)
656,701
—
—
—
—
—
210
656,911
Health Care Providers & Services
237,571
—
—
—
—
—
45,118
282,689
Machinery
28,622
—
—
—
—
—
6,866
35,488
Media
4,874
—
—
—
—
—
12,869
17,743
Online Lending
6,600
—
—
—
—
—
—
6,600
Personal Products
62,450
—
—
—
—
—
186,795
249,245
Trading Companies & Distributors
32,748
—
—
—
—
—
32,500
65,248
Structured Finance (A)
90,200
—
—
—
—
—
—
90,200
Total Control Investments
$
1,755,133
$
—
$
65,599
$
—
$
—
$
7,200
$
654,499
$
2,482,431
Affiliate Investments
Commercial Services & Supplies
$
3,680
$
—
$
—
$
—
$
—
$
—
$
10,302
$
13,982
Diversified Consumer Services
45,720
18,164
122,272
—
—
—
—
186,156
Textiles, Apparel & Luxury Goods
—
—
—
—
—
—
2,805
2,805
Total Affiliate Investments
$
49,400
$
18,164
$
122,272
$
—
$
—
$
—
$
13,107
$
202,943
Non-Control/Non-Affiliate Investments
Air Freight & Logistics
$
—
$
—
$
12,500
$
—
$
—
$
—
$
—
$
12,500
Auto Components
18,307
—
57,016
—
—
—
—
75,323
Chemicals
28,745
—
—
—
—
—
—
28,745
Commercial Services & Supplies
9,718
—
85,184
—
—
—
—
94,902
Communications Equipment
9,151
—
50,558
—
—
—
—
59,709
Consumer Finance
37,429
—
12,525
—
—
—
—
49,954
Distributors
168,942
—
103,730
—
—
—
—
272,672
Diversified Consumer Services
—
—
22,659
—
—
—
—
22,659
Diversified Financial Services
30,165
—
—
—
—
—
—
30,165
Diversified Telecommunication Services
26,818
—
39,515
—
—
—
—
66,333
Entertainment
40,585
—
—
—
—
—
—
40,585
Food Products
—
—
61,409
—
—
—
—
61,409
Health Care Equipment & Supplies
—
—
7,478
—
—
—
—
7,478
Health Care Providers & Services
179,401
—
121,279
—
—
—
—
300,680
Hotels, Restaurants & Leisure
24,502
—
—
—
—
—
—
24,502
Household Durables
—
—
6,962
3,950
—
—
2,001
12,913
Household Products
21,186
—
—
—
—
—
—
21,186
Insurance
—
—
21,911
—
—
—
—
21,911
Interactive Media & Services
180,127
—
—
—
—
—
—
180,127
Internet & Direct Marketing Retail
54,677
—
—
—
—
—
—
54,677
IT Services
170,228
—
90,671
—
—
—
—
260,899
Leisure Products
20,241
—
—
—
—
—
1
20,242
Machinery
57,389
—
4,976
—
—
—
—
62,365
Media
61,224
—
—
—
—
—
26,991
88,215
Paper & Forest Products
4,418
—
11,429
—
—
—
—
15,847
Professional Services
83,958
—
48,057
—
—
—
—
132,015
Software
—
—
22,240
—
—
—
—
22,240
Technology Hardware, Storage & Peripherals
—
—
12,431
—
—
—
—
12,431
Textiles, Apparel & Luxury Goods
162,639
—
36,868
—
—
—
—
199,507
Transportation Infrastructure
—
—
30,384
—
—
—
—
30,384
Structured Finance
—
—
—
—
1,090,175
—
—
1,090,175
Total Non-Control/Non-Affiliate
$
1,389,850
$
—
$
859,782
$
3,950
$
1,090,175
$
—
$
28,993
$
3,372,750
Total Portfolio Investment Cost
$
3,194,383
$
18,164
$
1,047,653
$
3,950
$
1,090,175
$
7,200
$
696,599
$
6,058,124
See notes to consolidated financial statements.
35
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
The following table shows the composition of our investment portfolio at fair value by control designation, investment type and by industry as of June 30, 2021:
Industry
1st Lien Term Loan
1.5 Lien Term Loan
2nd Lien Term Loan
3rd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Fair Value Total
Fair Value % of Net Assets
Control Investments
Aerospace & Defense
$
75,406
$
—
$
—
$
—
$
—
$
—
$
8,834
$
84,240
2.1
%
Commercial Services & Supplies
79,780
—
—
—
—
3,715
—
83,495
2.1
%
Construction & Engineering
43,731
—
—
—
—
—
105,964
149,695
3.8
%
Consumer Finance
344,968
—
68,137
—
—
—
305,267
718,372
18.2
%
Diversified Consumer Services
—
—
—
—
—
—
3,833
3,833
0.1
%
Energy Equipment & Services
57,078
—
—
—
—
—
26,126
83,204
2.1
%
Equity Real Estate Investment Trusts (REITs)
656,701
—
—
—
—
—
436,254
1,092,955
27.6
%
Health Care Providers & Services
237,571
—
—
—
—
—
174,768
412,339
10.5
%
Machinery
28,622
—
—
—
—
—
21,071
49,693
1.3
%
Media
4,874
—
—
—
—
—
42,014
46,888
1.2
%
Online Lending
6,600
—
—
—
—
—
—
6,600
0.2
%
Personal Products
62,450
—
—
—
—
—
8,647
71,097
1.8
%
Trading Companies & Distributors
27,106
—
—
—
—
—
—
27,106
0.7
%
Structured Finance (A)
90,200
—
—
—
—
—
—
90,200
2.3
%
Total Control Investments
$
1,715,087
$
—
$
68,137
$
—
$
—
$
3,715
$
1,132,778
$
2,919,717
74.0
%
Fair Value % of Net Assets
43.5
%
—
%
1.7
%
—
%
—
%
0.1
%
28.7
%
74.0
%
Affiliate Investments
Commerical Sevices & Supplies
$
3,680
$
—
$
—
$
—
$
—
$
—
$
13,760
$
17,440
0.4
%
Diversified Consumer Services
47,746
18,164
122,272
—
—
—
124,907
313,089
7.9
%
Textiles, Apparel & Luxury Goods
—
—
—
—
—
—
26,205
26,205
0.7
%
Total Affiliate Investments
$
51,426
$
18,164
$
122,272
$
—
$
—
$
—
$
164,872
$
356,734
9.0
%
Fair Value % of Net Assets
1.3
%
0.5
%
3.1
%
—
%
—
%
—
%
4.1
%
9.0
%
Non-Control/Non-Affiliate Investments
Air Freight & Logistics
$
—
$
—
$
12,500
$
—
$
—
$
—
$
—
$
12,500
0.3
%
Auto Components
18,633
—
57,887
—
—
—
—
76,520
1.9
%
Commercial Services & Supplies
9,800
—
85,382
—
—
—
—
95,182
2.4
%
Communications Equipment
9,556
—
49,325
—
—
—
—
58,881
1.5
%
Chemicals
28,863
—
—
—
—
—
—
28,863
0.7
%
Consumer Finance
38,041
—
15,188
—
—
—
—
53,229
1.3
%
Distributors
168,832
—
6,936
—
—
—
—
175,768
4.5
%
Diversified Consumer Services
—
—
22,711
—
—
—
—
22,711
0.6
%
Diversified Financial Services
30,165
—
—
—
—
—
—
30,165
0.8
%
Diversified Telecommunication Services
27,278
—
40,170
—
—
—
—
67,448
1.7
%
Entertainment
40,928
—
—
—
—
—
—
40,928
1.0
%
Food Products
—
—
61,948
—
—
—
—
61,948
1.6
%
Health Care Equipment & Supplies
—
—
6,721
—
—
—
—
6,721
0.2
%
Health Care Providers & Services
179,768
—
122,000
—
—
—
—
301,768
7.6
%
Hotels, Restaurants & Leisure
23,624
—
—
—
—
—
—
23,624
0.6
%
Household Durables
—
—
5,629
3,950
—
—
5,824
15,403
0.4
%
Household Products
21,186
—
—
—
—
—
—
21,186
0.5
%
Insurance
—
—
22,280
—
—
—
—
22,280
0.6
%
Interactive Media & Services
180,127
—
—
—
—
—
—
180,127
4.6
%
Internet & Direct Marketing Retail
56,114
—
—
—
—
—
—
56,114
1.5
%
IT Services
170,228
—
91,490
—
—
—
—
261,718
6.7
%
Leisure Products
20,287
—
—
—
—
—
—
20,287
0.5
%
Machinery
57,016
—
4,973
—
—
—
—
61,989
1.6
%
Media
60,224
—
—
—
—
—
707
60,931
1.5
%
Paper & Forest Products
4,468
—
11,347
—
—
—
—
15,815
0.4
%
Professional Services
82,058
—
50,000
—
—
—
—
132,058
3.3
%
Software
—
—
22,500
—
—
—
—
22,500
0.6
%
See notes to consolidated financial statements.
36
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
Industry
1st Lien Term Loan
1.5 Lien Term Loan
2nd Lien Term Loan
3rd Lien Term Loan
Subordinated Structured Notes
Unsecured Debt
Equity (B)
Fair Value Total
Fair Value % of Net Assets
Technology Hardware, Storage & Peripherals
—
—
12,500
—
—
—
—
12,500
0.3
%
Textiles, Apparel & Luxury Goods
162,639
—
36,515
—
—
—
—
199,154
5.0
%
Transportation Infrastructure
—
—
30,900
—
—
—
—
30,900
0.8
%
Structured Finance
—
—
—
—
756,109
—
—
756,109
19.2
%
Total Non-Control/Non-Affiliate
$
1,389,835
$
—
$
768,902
$
3,950
$
756,109
$
—
$
6,531
$
2,925,327
74.2
%
Fair Value % of Net Assets
35.2
%
—
%
19.5
%
0.1
%
19.2
%
—
%
0.2
%
74.2
%
Total Portfolio
$
3,156,348
$
18,164
$
959,311
$
3,950
$
756,109
$
3,715
$
1,304,181
$
6,201,778
157.2
%
Fair Value % of Net Assets
80.0
%
0.5
%
24.3
%
0.1
%
19.2
%
0.1
%
33.0
%
157.2
%
(A) Our SSN investments do not have industry concentrations and as such have been separated in the tables above.
(B) Equity, unless specifically stated otherwise, includes our investments in preferred stock, common stock, membership interests, net profits interests, net operating income interests, net revenue interests, overriding royalty interests, escrows receivable, and warrants.
See notes to consolidated financial statements.
37
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(39)The interest rate on these investments, excluding those on non-accrual, contains a paid in kind (“PIK”) provision, whereby the issuer has either the option or the obligation to make interest payments with the issuance of additional securities. The interest rate in the schedule represents the current interest rate in effect for these investments.
The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing credit agreements, as of and for three months ended March 31, 2022:
Security Name
PIK Rate - Capitalized
PIK Rate - Paid as cash
Maximum Current PIK Rate
CP Energy Services Inc. - First Lien Term Loan
12.01
%
—
%
12.01
%
(A)
CP Energy Services Inc. - First Lien Term Loan A to Spartan Energy Services, LLC
9.00
%
—
%
9.00
%
(B)
Credit Central Loan Company, LLC - First Lien Term Loan
10.00
%
—
%
10.00
%
(C)
Echelon Transportation, LLC - First Lien Term Loan
2.25
%
—
%
2.25
%
(D)
First Tower Finance Company LLC - First Lien Term Loan
4.11
%
7.89
%
12.00
%
InterDent, Inc. - First Lien Term Loan B
12.00
%
—
%
12.00
%
MITY, Inc. - First Lien Term Loan A
6.53
%
3.47
%
—
%
(E)
MITY, Inc. - First Lien Term Loan B
7.88
%
2.12
%
10.00
%
(E)
National Property REIT Corp. - First Lien Term Loan A
—
%
3.53
%
3.53
%
National Property REIT Corp. - First Lien Term Loan B
—
%
5.50
%
5.50
%
National Property REIT Corp. - First Lien Term Loan C
—
%
2.25
%
2.25
%
National Property REIT Corp. - First Lien Term Loan D
—
%
2.50
%
2.50
%
Nationwide Loan Company LLC - First Lien Term Loan
—
%
10.00
%
10.00
%
Pacific World Corporation - Revolving Line of Credit
8.25
%
—
%
8.25
%
(F)
Pacific World Corporation - First Lien Term Loan A
6.25
%
—
%
6.25
%
The Octave Music Group, Inc. (fka Touchtunes) - First Lien Term Loan
—
%
0.75
%
0.75
%
Town & Country Holdings, Inc. - First Lien Term Loan
8.125
%
—
%
8.125
%
(G)
TPS, LLC - First Lien Term Loan
1.50
%
—
%
1.50
%
Valley Electric Co. of Mt. Vernon, Inc. - First Lien Term Loan
0.86
%
1.64
%
2.50
%
Valley Electric Company, Inc. - First Lien Term Loan
—
%
10.00
%
10.00
%
Valley Electric Company, Inc. - First Lien Term Loan B
—
%
—
%
—
%
(H)
Venio LLC - First Lien Term Loan
1.00
%
—
%
1.00
%
(A) Effective March 31, 2022, the CP Energy Fourteenth Amendment to Loan Agreement was amended to allow 100% of the March 31, 2022 interest accruing in cash to be payable in kind resulting in a current PIK rate capitalized of 12.01%.
(B) On October 28, 2021, the Spartan Energy Services, LLC Twenty-Second Amendment to Amended and Restated Senior Secured Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 9.00%.
(C) On December 17, 2018, the Credit Central Senior Subordinated Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 20.00%.
(D) On January 31, 2018, the Echelon Fourth Amended and Restated Credit Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 14.00%. On January 31, 2022, the Echelon Fifth Amendment and Restated Credit Agreement was amended to remove the PIK rate.
(E) On March 23, 2021, the Mity Amendment No. 1 and Waiver to Note Purchase Agreement was amended to allow Senior Secured Note A and Senior Secured Note B interest accruing in cash to be payable in kind resulting in a maximum current TLA PIK rate of 10% and TLB PIK rate of 20.00%.
(F) Effective as of December 29, 2021, the Pacific World Corporation Amendment No. 8 was amended to allow the Revolving Line of Credit interest accruing in cash to be payable in kind resulting in a maximum current rate of 8.25%.
(G) On December 31, 2021, the Town & Country Holdings, Inc. Seventh Amendment to Loan Agreement was amended to allow the First Lien Term loan interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 8.125%.
(H) On March 28, 2022, the Valley Electric Company, Inc, Loan Agreement was amended to allow interest accruing at a maximum current PIK rate of 4.50%.
See notes to consolidated financial statements.
38
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
The following table provides additional details on these PIK investments, including the maximum annual PIK interest rate allowed under the existing credit agreements, as of and for three months ended June 30, 2021:
Security Name
PIK Rate - Capitalized
PIK Rate - Paid as cash
Maximum Current PIK Rate
Cinedigm DC Holdings, LLC - First Lien Term Loan
—%
2.50%
2.50%
CP Energy Services Inc. - First Lien Term Loan
12.00%
—%
12.00%
(A)
Credit Central Loan Company, LLC - Second Lien Term Loan
—%
10.00%
10.00%
(B)
Echelon Transportation, LLC - First Lien Term Loan
2.25%
—%
2.25%
(C)
Echelon Transportation, LLC - First Lien Term Loan
1.00%
—%
1.00%
(D)
First Tower Finance Company LLC - First Lien Term Loan
3.69%
8.31%
12.00%
InterDent, Inc. - First Lien Term Loan B
12.00%
—%
12.00%
MITY, Inc. - First Lien Term Loan A
10.00%
—%
—%
(E)
MITY, Inc. - First Lien Term Loan B
20.00%
—%
10.00%
(E)
National Property REIT Corp. - First Lien Term Loan A
—%
3.53%
3.53%
National Property REIT Corp. - First Lien Term Loan B
—%
5.50%
5.50%
National Property REIT Corp. - First Lien Term Loan C
—%
2.25%
2.25%
National Property REIT Corp. - First Lien Term Loan D
—%
2.50%
2.50%
Nationwide Loan Company LLC - First Lien Term Loan
—%
10.00%
10.00%
Pacific World Corporation - First Lien Term Loan A
6.25%
—%
6.25%
PGX Holdings, Inc. - Second Lien Term Loan
15.75%
—%
15.75%
PGX Holdings, Inc. - 1.5 Lien
14.50%
—%
14.50%
PGX Holdings, Inc. - First Lien Term Loan
4.25%
—%
4.25%
Rosa Mexicano - First Lien Revolving Line of Credit
4.50%
—%
4.50%
(F)
Rosa Mexicano - First Lien Term Loan
4.50%
—%
4.50%
(F)
The Octave Music Group, Inc. (fka Touchtunes) - First Lien Term Loan
—%
0.75%
0.75%
TPS, LLC - First Lien Term Loan
1.50%
—%
1.50%
Valley Electric Co. of Mt. Vernon, Inc. - First Lien Term Loan
—%
2.50%
2.50%
Valley Electric Company, Inc. - First Lien Term Loan
—%
10.00%
10.00%
Venio LLC - First Lien Term Loan
10.00%
—%
10.00%
(A) On June 29, 2021, the CP Energy Eleventh Amendment to Loan Agreement was amended to allow 100% of the June 30, 2021 interest accruing in cash to be payable in kind resulting in a current PIK rate capitalized of 12.00%.
(B) On December 17, 2018, the Credit Central Senior Subordinated Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 20.00%.
(C) On January 31, 2018, the Echelon Fourth Amended and Restated Credit Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 14.00%.
(D) On January 31, 2018, the Echelon Fourth Amended and Restated Credit Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 12.00%.
(E) On March 23, 2021, the Mity Amendment No. 1 and Waiver to Note Purchase Agreement was amended to allow Senior Secured Note A and Senior Secured Note B interest accruing in cash to be payable in kind resulting in a maximum current TLA PIK rate of 10% and TLB PIK rate of 20.00%.
(F) On September 30, 2020, the Rosa Mexicano Sixth Amendment to Loan Agreement was amended to allow interest accruing in cash to be payable in kind resulting in a maximum current PIK rate of 4.50% after the end of the Delayed Incremental Required Equity Contribution Period. The option for the interest accruing in cash to be payable in kind expired on June 30, 2021.
See notes to consolidated financial statements.
39
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(40)As defined in the 1940 Act, we are deemed to “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the nine months ended March 31, 2022 with these controlled investments were as follows:
Controlled Companies
Fair Value at June 30, 2021
Gross Additions (Cost)(A)
Gross Reductions (Cost)(B)
Net unrealized gains (losses)
Fair Value at March 31, 2022
Interest income
Dividend income
Other income
Net realized gains (losses)
CP Energy Services Inc.
$
44,621
$
3,901
$
—
$
17,488
$
66,010
$
3,901
$
—
$
—
$
—
CP Energy - Spartan Energy Services, LLC
26,866
10,602
—
14,983
52,451
1,284
—
6
—
Credit Central Loan Company, LLC
78,023
7,003
—
1,130
86,156
11,182
—
—
—
Echelon Transportation LLC
84,240
10,646
—
(26,927)
67,959
6,888
—
—
—
First Tower Finance Company LLC
592,356
34,927
(11,151)
29,024
645,156
54,959
—
7,898
—
Freedom Marine Solutions, LLC
11,717
—
—
221
11,938
—
—
—
—
InterDent, Inc.
412,339
31,341
(246)
(33,677)
409,757
19,537
—
200
—
Kickapoo Ranch Pet Resort
3,833
—
—
—
3,833
—
—
—
—
MITY, Inc.
49,680
4,383
—
6,432
60,495
5,421
—
—
10
National Property REIT Corp.
1,189,755
280,167
(289,882)
348,536
1,528,576
46,441
—
45,867
—
Nationwide Loan Company LLC
47,993
—
—
2,321
50,314
3,084
2,150
—
—
NMMB, Inc.
46,888
25,000
(12,983)
21,363
80,268
394
7,034
450
5,294
Pacific World Corporation
71,097
9,863
—
(24,173)
56,787
3,507
—
—
—
R-V Industries, Inc.
49,693
5,000
—
4,062
58,755
2,184
441
125
—
Universal Turbine Parts, LLC
27,106
—
(24)
(1,315)
25,767
1,766
—
—
—
USES Corp.
33,815
—
—
(7,899)
25,916
152
—
—
—
Valley Electric Company, Inc.
149,695
13,022
(15,339)
989
148,367
5,336
2,509
760
—
Total
$
2,919,717
$
435,855
$
(329,625)
$
352,558
$
3,378,505
$
166,036
$
12,134
$
55,306
$
5,304
(A) Gross additions include increases in the cost basis of the investments resulting from new portfolio investments, OID accretion and PIK interest, and any transfer of investments.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales, impairments, and any transfer of investments.
(41)As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities. Transactions during the nine months ended March 31, 2022 with these affiliated investments were as follows:
Affiliated Companies
Fair Value at June 30, 2021
Gross Additions (Cost)(A)
Gross Reductions (Cost)(B)
Net unrealized gains (losses)
Fair Value at March 31, 2022
Interest income
Dividend income
Other income
Net realized gains (losses)
Nixon, Inc.
—
—
—
—
—
—
—
—
—
PGX Holdings, Inc.
313,089
224,984
(190,082)
14,189
362,180
23,259
—
3,961
—
RGIS Services, LLC
17,440
—
—
1,496
18,936
238
95
—
—
Targus Cayman HoldCo Limited
26,205
—
—
10,331
36,536
—
—
—
—
Total
$
356,734
$
224,984
$
(190,082)
$
26,016
$
417,652
$
23,497
$
95
$
3,961
$
—
(A) Gross additions include increases in the cost basis of the investments resulting from new portfolio investments, PIK interest, and any transfer of investments.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales, impairments, and any transfer of investments.
See notes to consolidated financial statements.
40
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(42)As defined in the 1940 Act, we are deemed to “Control” these portfolio companies because we own more than 25% of the portfolio company’s outstanding voting securities. Transactions during the year ended June 30, 2021 with these controlled investments were as follows:
Portfolio Company
Fair Value at June 30, 2020
Gross Additions (Cost)(A)
Gross Reductions (Cost)(B)
Net unrealized gains (losses)
Fair Value at June 30, 2021
Interest income
Dividend income
Other income
Net realized gains (losses)
CP Energy Services Inc.
$
51,174
$
4,678
$
(1)
$
(11,230)
$
44,621
$
4,680
$
—
$
—
$
—
CP Energy - Spartan Energy Services, LLC
18,711
28,694
(23,361)
2,822
26,866
1,252
—
25
2,832
Credit Central Loan Company, LLC
75,685
9,493
(3,764)
(3,391)
78,023
14,139
—
—
—
Echelon Transportation LLC
85,627
9,935
—
(11,322)
84,240
9,765
—
—
—
First Tower Finance Company LLC
508,465
3,001
(5,362)
86,252
592,356
60,928
—
21,081
—
Freedom Marine Solutions, LLC
12,351
600
—
(1,234)
11,717
—
—
—
—
InterDent, Inc.
230,757
15,637
—
165,945
412,339
22,479
—
—
—
Kickapoo Ranch Pet Resort
3,286
—
—
547
3,833
—
—
—
—
MITY, Inc.
51,905
7,208
850
(10,283)
49,680
10,078
—
66
2
National Property REIT Corp.
878,733
225,742
(83,450)
168,730
1,189,755
57,296
—
39,924
—
Nationwide Loan Company LLC
37,238
173
384
10,198
47,993
4,105
2,381
405
—
NMMB, Inc.
33,668
—
(152)
13,372
46,888
528
—
—
—
Pacific World Corporation
59,907
2,542
—
8,648
71,097
4,317
—
—
—
R-V Industries, Inc.
38,565
—
—
11,128
49,693
2,862
—
—
—
Universal Turbine Parts, LLC
26,599
316
(518)
709
27,106
2,347
—
—
121
USES Corp.
17,325
2,000
—
14,490
33,815
102
—
—
—
Valley Electric Company, Inc.
129,296
—
1,061
19,338
149,695
7,105
2,261
666
—
Total
$
2,259,292
$
310,019
$
(114,313)
$
464,719
$
2,919,717
$
201,983
$
4,642
$
62,167
$
2,955
(A) Gross additions include increases in the cost basis of the investments resulting from new portfolio investments, PIK interest, and any transfer of investments.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales, impairments, and any transfer of investments.
(43)As defined in the 1940 Act, we are deemed to be an “Affiliated company” of these portfolio companies because we own more than 5% of the portfolio company’s outstanding voting securities. Transactions during the year ended June 30, 2021 with these affiliated investments were as follows:
Portfolio Company
Fair Value at June 30, 2020
Gross Additions (Cost)(A)
Gross Reductions (Cost)(B)
Net unrealized gains (losses)
Fair Value at June 30, 2021
Interest income
Dividend income
Other income
Net realized gains (losses)
Edmentum Ultimate Holdings, LLC
$
59,618
$
9,278
$
(63,425)
$
(5,471)
$
—
$
8,955
$
—
$
33
$
4,469
Nixon, Inc.
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
—
PGX Holdings, Inc.
$
106,711
$
81,113
$
(1,489)
$
126,754
$
313,089
$
22,016
$
—
$
76
$
—
RGIS Services, LLC
$
—
$
19,276
$
(5,294)
$
3,458
$
17,440
$
—
$
378
$
—
$
—
Targus Cayman HoldCo Limited
$
21,208
$
—
$
—
$
4,997
$
26,205
$
—
$
—
$
—
$
—
187,537
109,667
(70,208)
129,738
356,734
30,971
378
109
4,469
(A) Gross additions include increases in the cost basis of the investments resulting from new portfolio investments, PIK interest, and any transfer of investments.
(B) Gross reductions include decreases in the cost basis of investments resulting from principal collections related to investments repayments or sales, impairments, and any transfer of investments.
See notes to consolidated financial statements.
41
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED SCHEDULES OF INVESTMENTS (CONTINUED)
(in thousands, except share data)
Endnote Explanations as of March 31, 2022 (Unaudited) and June 30, 2021 (Continued)
(44)Acquisition date represents the date of PSEC's initial investment. Follow-on acquisitions have occurred on the following dates to arrive at PSEC's current investment (excluding effects of capitalized PIK interest, premium/original issue discount amortization/accretion, and partial repayments) (See endnote 45 for NPRC equity follow-on acquisitions):
(45)Since Prospect's initial common equity investment in NPRC on December 31, 2013, we have made numerous additional follow-on investments that have been used to invest in new and existing properties as well as online consumer loans and rated secured structured notes. These follow-on acquisitions are summarized by fiscal year below (excluding effects of return of capital distributions). Details of specific transactions are included in the respective fiscal year Form 10-K filing (refer to endnote 44 for NPRC term loan follow-on investments):
Fiscal Year
Follow-On Investments (NPRC Common Stock, excluding cost of initial investment)
2014
$
4,555
2015
68,693
2016
93,857
2017
116,830
2018
137,024
2019
11,582
2020
19,800
2022
11,620
(46)Prospect owns 38.95% of the preferred stock of Legere Pharmaceutical Holdings, Inc. (“Legere”), which represents 4.98% voting interest in Legere. Legere is the parent company of the borrower, Preventics, Inc. (d/b/a Legere Pharmaceuticals).
(47)This investment represents a Level 2 security in the ASC 820 table as of March 31, 2022. See Notes 2 and 3 within the accompanying notes to consolidated financial statements for further discussion.
(48)During the year ended June 30, 2021, Venio, LLC repaid in full third-party first lien senior secured debt and, as a result of such repayment, our second lien secured term loan that was previously contractually subordinated to such third-party first lien senior secured debt was re-characterized to a first lien senior secured term loan. In December 2020, Venio, LLC completed the sale of a majority of its assets and we received $3,693 in proceeds, which was applied to the outstanding principal balance of our first lien term loan. As of March 31, 2022, $14,517 in aggregate principal remained outstanding. We expect to receive additional distributions from remaining assets and legal claims against a third party.
(49)CP Iris Holdco I, Inc. and CP Iris Holdco II, Inc. are joint borrowers on the Second Lien Term Loan.
(50)Medical Solutions Holdings, Inc. and Medical Solutions, LLC are joint borrowers on the Second Lien Term Loan.
See notes to consolidated financial statements.
44
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(in thousands, except share and per share data)
Note 1. Organization
In this report, the terms “Prospect,” “the Company,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise.
Prospect is a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). We were organized on April 13, 2004, and were funded in an initial public offering completed on July 27, 2004.
On May 15, 2007, we formed a wholly owned subsidiary Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Our wholly owned subsidiary Prospect Small Business Lending, LLC (“PSBL”) was formed on January 27, 2014, and purchased small business whole loans from online small business loan originators, including On Deck Capital, Inc. (“OnDeck”). On September 30, 2014, we formed a wholly-owned subsidiary Prospect Yield Corporation, LLC (“PYC”) and effective October 23, 2014, PYC holds a portion of our collateralized loan obligations (“CLOs”), which we also refer to as subordinated structured notes (“SSNs”). Each of these subsidiaries have been consolidated since operations commenced.
We consolidate certain of our wholly owned and substantially wholly owned holding companies formed by us in order to facilitate our investment strategy. The following companies are included in our consolidated financial statements and are collectively referred to as the “Consolidated Holding Companies”: CP Holdings of Delaware LLC (“CP Holdings”); Credit Central Holdings of Delaware, LLC; Energy Solutions Holdings Inc.; First Tower Holdings of Delaware LLC (“First Tower Delaware”); MITY Holdings of Delaware Inc.; Nationwide Acceptance Holdings LLC; NMMB Holdings, Inc. (“NMMB Holdings”); NPH Property Holdings, LLC (“NPH”); Prospect Opportunity Holdings I, Inc. (“POHI”); SB Forging Company, Inc. (“SB Forging”); STI Holding, Inc.; UTP Holdings Group Inc. (“UTP Holdings”); Valley Electric Holdings I, Inc. (“Valley Holdings I”); and Valley Electric Holdings II, Inc. (“Valley Holdings II”).
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect Administration LLC (“Prospect Administration” or the “Administrator”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior and subordinated debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. We work with the management teams or financial sponsors to identify investments with historical cash flows, asset collateral or contracted pro forma cash flows for investment.
Note 2. Significant Accounting Policies
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) pursuant to the requirements for reporting on Form 10-Q, ASC 946, Financial Services—Investment Companies (“ASC 946”), and Articles 6, 10 and 12 of Regulation S-X. Under the 1940 Act, ASC 946, and the regulations pursuant to Article 6 of Regulation S-X, we are precluded from consolidating any entity other than another investment company or an operating company which provides substantially all of its services to benefit us. Our consolidated financial statements include the accounts of Prospect, PCF, PSBL, PYC, and the Consolidated Holding Companies. All intercompany balances and transactions have been eliminated in consolidation. The financial results of our non-substantially wholly-owned holding companies and operating portfolio company investments are not consolidated in the financial statements. Any operating companies owned by the Consolidated Holding Companies are not consolidated.
Reclassifications
Certain reclassifications have been made in the presentation of prior consolidated financial statements and accompanying notes to conform to the presentation as of and for the nine months ended March 31, 2022.
45
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of income, expenses, and gains and losses during the reported period. Changes in the economic environment, financial markets, creditworthiness of the issuers of our investment portfolio and any other parameters used in determining these estimates could cause actual results to differ, and these differences could be material.
Investment Classification
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of more than 25% of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As a BDC, we must not acquire any assets other than “qualifying assets” specified in the 1940 Act unless, at the time the acquisition is made, at least 70% of our total assets are qualifying assets (with certain limited exceptions). As of March 31, 2022 and June 30, 2021, our qualifying assets as a percentage of total assets, stood at 79.22% and 76.31%, respectively.
Investment Transactions
Investments are recognized when we assume an obligation to acquire a financial instrument and assume the risks for gains or losses related to that instrument. Specifically, we record all security transactions on a trade date basis. Investments are derecognized when we assume an obligation to sell a financial instrument and forego the risks for gains or losses related to that instrument. Amounts for investments traded but not yet settled are reported in Due to Broker or Due from Broker, in the Consolidated Statements of Assets and Liabilities.
Foreign Currency
Foreign currency amounts are translated into US Dollars (USD) on the following basis:
i.fair value of investment securities, other assets and liabilities—at the spot exchange rate on the last business day of the period; and
ii.purchases and sales of investment securities, income and expenses—at the rates of exchange prevailing on the respective dates of such investment transactions, income or expenses.
We do not isolate that portion of the results of operations resulting from changes in foreign exchange rates on investments from the fluctuations arising from changes in fair values of investments held or disposed of during the period. Such fluctuations are included within the net realized and net change in unrealized gains or losses from investments in the Consolidated Statements of Operations.
Investment Risks
Our investments are subject to a variety of risks. Those risks include the following:
Market Risk
Market risk represents the potential loss that can be caused by a change in the fair value of the financial instrument.
Credit Risk
Credit risk represents the risk that we would incur if the counterparties failed to perform pursuant to the terms of their agreements with us.
46
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Liquidity Risk
Liquidity risk represents the possibility that we may not be able to rapidly adjust the size of our investment positions in times of high volatility and financial stress at a reasonable price.
Interest Rate Risk
Interest rate risk represents a change in interest rates, which could result in an adverse change in the fair value of an interest-bearing financial instrument.
Prepayment Risk
Many of our debt investments allow for prepayment of principal without penalty. Downward changes in interest rates may cause prepayments to occur at a faster than expected rate, thereby effectively shortening the maturity of the security and making us less likely to fully earn all of the expected income of that security and reinvesting in a lower yielding instrument.
Structured Credit Related Risk
CLO investments may be riskier and less transparent to us than direct investments in underlying companies. CLOs typically will have no significant assets other than their underlying senior secured loans. Therefore, payments on CLO investments are and will be payable solely from the cash flows from such senior secured loans.
Foreign Currency
Investments denominated in foreign currencies and foreign currency transactions may involve certain considerations and risks not typically associated with those of domestic origin. These risks include, but are not limited to, currency fluctuations and revaluations and future adverse political, social and economic developments, which could cause investments in foreign markets to be less liquid and prices more volatile than those of comparable U.S. companies or U.S. government securities.
Other Risks
Political developments, including civil conflicts and war, sanctions or other measures by the United States or other governments, natural disasters, public health crises and other events outside of the Company's control can directly or indirectly have a material adverse impact on the Company and our portfolio companies.
Investment Valuation
As a BDC, and in accordance with the 1940 Act, we fair value our investment portfolio on a quarterly basis, with any unrealized gains and losses reflected in net increase (decrease) in net assets resulting from operations on our Consolidated Statement of Operations. To value our investments, we follow the guidance of ASC 820, Fair Value Measurement (“ASC 820”), that defines fair value, establishes a framework for measuring fair value in conformity with GAAP, and requires disclosures about fair value measurements. In accordance with ASC 820, the fair value of our investments is defined as the price that we would receive upon selling an investment in an orderly transaction to an independent buyer in the principal or most advantageous market in which that investment is transacted.
ASC 820 classifies the inputs used to measure these fair values into the following hierarchy:
Level 1: Quoted prices in active markets for identical assets or liabilities, accessible by us at the measurement date.
Level 2: Quoted prices for similar assets or liabilities in active markets, or quoted prices for identical or similar assets or liabilities in markets that are not active, or other observable inputs other than quoted prices.
Level 3: Unobservable inputs for the asset or liability.
In all cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to each investment.
47
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Our Board of Directors has established procedures for the valuation of our investment portfolio. These procedures are detailed below.
Investments for which market quotations are readily available are valued at such market quotations.
For most of our investments, market quotations are not available. With respect to investments for which market quotations are not readily available or when such market quotations are deemed not to represent fair value, our Board of Directors has approved a multi-step valuation process each quarter, as described below.
1.Each portfolio company or investment is reviewed by our investment professionals with independent valuation firms engaged by our Board of Directors.
2.The independent valuation firms prepare independent valuations for each investment based on their own independent assessments and issue their report.
3.The Audit Committee of our Board of Directors reviews and discusses with the independent valuation firms the valuation reports, and then makes a recommendation to the Board of Directors of the value for each investment.
4.The Board of Directors discusses valuations and determines the fair value of each investment in our portfolio in good faith based on the input of the Investment Adviser, the respective independent valuation firm and the Audit Committee.
Our non-CLO investments are valued utilizing a yield technique, enterprise value (“EV”) technique, net asset value technique, asset recovery technique, discounted cash flow technique, or a combination of techniques, as appropriate. The yield technique uses loan spreads for loans and other relevant information implied by market data involving identical or comparable assets or liabilities. Under the EV technique, the EV of a portfolio company is first determined and allocated over the portfolio company’s securities in order of their preference relative to one another (i.e., “waterfall” allocation). To determine the EV, we typically use a market (multiples) valuation approach that considers relevant and applicable market trading data of guideline public companies, transaction metrics from precedent merger and acquisitions transactions, and/or a discounted cash flow technique. The net asset value technique, an income approach, is used to derive a value of an underlying investment (such as real estate property) by dividing a relevant earnings stream by an appropriate capitalization rate. For this purpose, we consider capitalization rates for similar properties as may be obtained from guideline public companies and/or relevant transactions. The asset recovery technique is intended to approximate the net recovery value of an investment based on, among other things, assumptions regarding liquidation proceeds based on a hypothetical liquidation of a portfolio company’s assets. The discounted cash flow technique converts future cash flows or earnings to a range of fair values from which a single estimate may be derived utilizing an appropriate discount rate. The fair value measurement is based on the net present value indicated by current market expectations about those future amounts.
In applying these methodologies, additional factors that we consider in valuing our investments may include, as we deem relevant: security covenants, call protection provisions, and information rights; the nature and realizable value of any collateral; the portfolio company’s ability to make payments; the principal markets in which the portfolio company does business; publicly available financial ratios of peer companies; the principal market; and enterprise values, among other factors.
Our investments in CLOs are classified as Level 3 fair value measured securities under ASC 820 and are valued using a discounted multi-path cash flow model. The CLO structures are analyzed to identify the risk exposures and to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which is a simulation used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows from the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market as well as certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the multi-path cash flows. We are not responsible for and have no influence over the asset management of the portfolios underlying the CLO investments we hold, as those portfolios are managed by non-affiliated third-party CLO collateral managers. The main risk factors are default risk, prepayment risk, interest rate risk, downgrade risk, and credit spread risk.
48
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Valuation of Other Financial Assets and Financial Liabilities
ASC 825, Financial Instruments, specifically ASC 825-10-25, permits an entity to choose, at specified election dates, to measure eligible items at fair value (the “Fair Value Option”). We have not elected the Fair Value Option to report selected financial assets and financial liabilities. See Note 8 for the disclosure of the fair value of our outstanding debt and the market observable inputs used in determining fair value.
Convertible Notes
We have recorded the Convertible Notes at their contractual amounts. We have determined that the embedded conversion options in the Convertible Unsecured Notes are not required to be separately accounted for as a derivative under ASC 815, Derivatives and Hedging. See Note 5 for further discussion on our Convertible Notes outstanding.
Revenue Recognition
Realized gains or losses on the sale of investments are calculated using the specific identification method.
Interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis. Original issue discounts and market discounts are capitalized and accreted into interest income over the respective terms of the applicable loans using the effective interest method or straight-line, as applicable, and adjusted only for material amendments or prepayments. Upon a prepayment of a loan, prepayment premiums, original issue discount, or market discounts are recorded as interest income.
Loans are placed on non-accrual status when there is reasonable doubt that principal or interest will be collected. Unpaid accrued interest is generally reversed when a loan is placed on non-accrual status. Interest payments received on non-accrual loans are either applied to the cost basis or interest income, depending upon management’s judgment of the collectibility of the loan receivable. Non-accrual loans are restored to accrual status when past due principal and interest is paid and in management’s judgment, is likely to remain current and future principal and interest collections when due are probable. Interest received and applied against cost while a loan is on non-accrual, and PIK interest capitalized but not recognized while on non-accrual, is recognized prospectively on the effective yield basis through maturity of the loan when placed back on accrual status, to the extent deemed collectible by management. As of March 31, 2022, approximately 0.4% of our total assets at fair value are in non-accrual status.
Some of our loans and other investments may have contractual payment-in-kind (“PIK”) interest or dividends. PIK income computed at the contractual rate is accrued into income and reflected as receivable up to the capitalization date. PIK investments offer issuers the option at each payment date of making payments in cash or in additional securities. When additional securities are received, they typically have the same terms, including maturity dates and interest rates as the original securities issued. On these payment dates, we capitalize the accrued interest (reflecting such amounts in the basis as additional securities received). PIK generally becomes due at maturity of the investment or upon the investment being called by the issuer. At the point that we believe PIK is not fully expected to be realized, the PIK investment will be placed on non-accrual status. When a PIK investment is placed on non-accrual status, the accrued, uncapitalized interest or dividends are reversed from the related receivable through interest or dividend income, respectively. We do not reverse previously capitalized PIK interest or dividends. Upon capitalization, PIK is subject to the fair value estimates associated with their related investments. PIK investments on non-accrual status are restored to accrual status if we believe that PIK is expected to be realized.
Interest income from investments in Subordinated Structured Notes (typically preferred shares, income notes or subordinated notes of CLO funds) and “equity” class of security of securitized trust is recorded based upon an estimation of an effective yield to expected maturity utilizing assumed cash flows in accordance with ASC 325-40, Beneficial Interests in Securitized Financial Assets. We monitor the expected cash inflows from our CLO and securitized trust equity investments, including the expected residual payments, and the effective yield is determined and updated periodically.
Dividend income is recorded on the ex-dividend date.
Other income generally includes amendment fees, commitment fees, administrative agent fees and structuring fees which are recorded when earned. Excess deal deposits, net profits interests and overriding royalty interests are included in other income. See Note 10 for further discussion.
49
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Federal and State Income Taxes
We have elected to be treated as a RIC and intend to continue to comply with the requirements of the Code applicable to RICs. We are required to distribute at least 90% of our investment company taxable income and intend to distribute (or retain through a deemed distribution) all of our investment company taxable income and net capital gain to stockholders; therefore, we have made no provision for income taxes. The character of income and gains that we will distribute is determined in accordance with income tax regulations that may differ from GAAP. Book and tax basis differences relating to stockholder dividends and distributions and other permanent book and tax differences are reclassified to paid-in capital.
If we do not distribute (or are not deemed to have distributed) at least 98% of our annual ordinary income and 98.2% of our capital gains in the calendar year earned, we will generally be required to pay an excise tax equal to 4% of the amount by which 98% of our annual ordinary income and 98.2% of our capital gains exceed the distributions from such taxable income for the year. To the extent that we determine that our estimated current year annual taxable income will be in excess of estimated current year dividend distributions from such taxable income, we accrue excise taxes, if any, on estimated excess taxable income. As of March 31, 2022, we do not expect to have any excise tax due for the 2022 calendar year. Thus, we have not accrued any excise tax for this period.
If we fail to satisfy the annual distribution requirement or otherwise fail to qualify as a RIC in any taxable year, we would be subject to tax on all of our taxable income at regular corporate income tax rates. We would not be able to deduct distributions to stockholders, nor would we be required to make distributions. Distributions would generally be taxable to our individual and other non-corporate taxable stockholders as ordinary dividend income eligible for the reduced maximum rate applicable to qualified dividend income to the extent of our current and accumulated earnings and profits, provided certain holding period and other requirements are met. Subject to certain limitations under the Code, corporate distributions would be eligible for the dividends-received deduction. To qualify again to be taxed as a RIC in a subsequent year, we would be required to distribute to our stockholders our accumulated earnings and profits attributable to non-RIC years. In addition, if we failed to qualify as a RIC for a period greater than two taxable years, then, in order to qualify as a RIC in a subsequent year, we would be required to elect to recognize and pay tax on any net built-in gain (the excess of aggregate gain, including items of income, over aggregate loss that would have been realized if we had been liquidated) or, alternatively, be subject to taxation on such built-in gain recognized for a period of five years.
We follow ASC 740, Income Taxes (“ASC 740”). ASC 740 provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the consolidated financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold are recorded as a tax benefit or expense in the current year. As of March 31, 2022, we did not record any unrecognized tax benefits or liabilities. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based upon factors including, but not limited to, an on-going analysis of tax laws, regulations and interpretations thereof. Although we file both federal and state income tax returns, our major tax jurisdiction is federal. Our federal tax returns for the tax years ended August 31, 2018 and thereafter remain subject to examination by the Internal Revenue Service.
Dividends and Distributions to Common Shareholders
Dividends and distributions to common stockholders are recorded on the ex-dividend date. The amount, if any, to be paid as a monthly dividend or distribution is approved by our Board of Directors quarterly and is generally based upon our management’s estimate of our future taxable earnings. Net realized capital gains, if any, are distributed at least annually.
Our distributions may exceed our earnings, and therefore, portions of the distributions that we make may be a return of the money originally invested and represent a return of capital distribution to shareholders for tax purposes.
Financing Costs
We record origination expenses related to our Revolving Credit Facility, and Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Unsecured Notes”) as deferred financing costs. These expenses are deferred and amortized as part of interest expense using the straight-line method over the stated life of the obligation for our Revolving Credit Facility and for our Prospect Capital InterNotes®. The effective interest method is used to amortize deferred financing costs for our remaining Unsecured Notes over the respective expected life or maturity. In the event that we modify or extinguish our debt before maturity, we follow the guidance in ASC 470-50, Modification and Extinguishments (“ASC 470-50”). For modifications to or exchanges of our Revolving Credit Facility, any unamortized deferred costs relating to
50
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
lenders who are not part of the new lending group are expensed. For extinguishments of our Unsecured Notes, any unamortized deferred costs are deducted from the carrying amount of the debt in determining the gain or loss from the extinguishment.
Unamortized deferred financing costs are presented as a direct deduction to the respective Unsecured Notes (see Notes 5, 6, and 7).
We may record registration expenses related to shelf filings as prepaid expenses. These expenses consist principally of the Securities and Exchange Commission (“SEC”) registration fees, legal fees and accounting fees incurred. These prepaid expenses are charged to capital upon the receipt of proceeds from an equity offering or charged to expense if no offering is completed. As of March 31, 2022 and June 30, 2021, there are no prepaid expenses related to registration expenses and all amounts incurred have been expensed.
Guarantees and Indemnification Agreements
We follow ASC 460, Guarantees (“ASC 460”). ASC 460 elaborates on the disclosure requirements of a guarantor in its interim and annual consolidated financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at the inception of a guarantee, for those guarantees that are covered by ASC 460, the fair value of the obligation undertaken in issuing certain guarantees.
Per Share Information
In accordance with ASC 946, senior equity securities, such as preferred stock, are not considered in the calculation of net asset value per share. Net asset value per share also excludes the effects of assumed conversion of outstanding convertible securities, regardless of whether their conversion would have a diluting effect. Therefore, our net asset value is presented on the basis of per common share outstanding as of the applicable period end.
We compute earnings per common share in accordance with ASC 260, Earnings Per Share (“ASC 260”). Basic earnings per common share is calculated by dividing the net increase (decrease) in net assets resulting from operations applicable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share gives effect to all dilutive potential common shares outstanding using the if-converted method for Preferred Stock. Diluted earnings per share excludes all dilutive potential common shares if their effect is anti-dilutive.
Preferred Stock
In accordance with ASC 480-10-S99-3A, the Company’s Preferred Stock (as defined in “Note 9. Equity Offerings, Offering Expenses, and Distributions”) has been classified in temporary equity on the Statement of Assets and Liabilities for the fiscal year ended June 30, 2022. The Preferred Stock is recorded net of offering costs and issuance costs. Unpaid dividend relating to the Preferred Stock are included in the preferred stock carrying value on the Statement of Assets and Liabilities. Dividends declared on the Preferred Stock are included in preferred stock dividends on the Statement of Operations. 5.50% Preferred Stock issued prior to the issuance of our 5.35% Series A Preferred Stock has a carrying value on our Consolidated Statements of Assets and Liabilities equal to liquidation value per share.
Recent Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The standard is effective as of March 12, 2020 through December 31, 2022. Management is currently evaluating the impact of the optional guidance on the Company’s consolidated financial statements and disclosures. The Company did not utilize the optional expedients and exceptions provided by ASU 2020-04 during the three months ended March 31, 2022.
In August 2020, FASB issued ASU 2020-06, Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies the accounting for convertible instruments by removing the separation models for (1) convertible debt with a cash conversion feature and (2) convertible instruments with a beneficial conversion feature. As a result, after adoption, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost. Additionally, ASU 2020-06 requires the application of the if-converted method to calculate the impact of convertible instruments on diluted earnings per share. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021. We do not expect this ASU to have a material impact on our consolidated financial statements and disclosures.
51
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Note 3. Portfolio Investments
At March 31, 2022, we had investments in 127 long-term portfolio investments and CLOs, which had an amortized cost of $6,887,937 and a fair value of $7,429,931. At June 30, 2021, we had investments in 124 long-term portfolio investments and CLOs, which had an amortized cost of $6,058,124 and a fair value of $6,201,778.
The original cost basis of debt placement and equity securities acquired, including follow-on investments for existing portfolio companies, payment-in-kind interest, and structuring fees, totaled $1,844,869 and $781,138 during the nine months ended March 31, 2022 and March 31, 2021, respectively. Debt repayments and considerations from sales of equity securities of approximately $952,621 and $673,329 were received during the nine months ended March 31, 2022 and March 31, 2021, respectively.
During the nine months ended March 31, 2022, we capitalized $61,030 of payment in kind interest on our statement of cash flows. Of this amount, approximately $56,824 was accrued as interest income in the current period and the remaining $4,206 is included due to the timing of interest payment dates and resulting capitalization occurring in the current year. During the nine months ended March 31, 2021, we capitalized $58,750 of payment in kind interest on our statement of cash flows. Of this amount, approximately $53,729 was accrued as interest income in the current period and the remaining $5,021 is included due to the timing of interest payment dates and resulting capitalization occurring in the prior year.
The following table shows the composition of our investment portfolio as of March 31, 2022 and June 30, 2021:
March 31, 2022
June 30, 2021
Cost
Fair Value
Cost
Fair Value
First Lien Revolving Line of Credit
$
36,235
$
36,214
$
27,522
$
27,503
First Lien Debt
3,629,580
3,561,170
3,166,861
3,128,845
1.5 Lien Debt
—
—
18,164
18,164
Second Lien Debt
1,480,241
1,373,240
1,047,653
959,311
Third Lien Debt
—
—
3,950
3,950
Unsecured Debt
7,200
5,719
7,200
3,715
Subordinated Structured Notes
1,016,280
728,833
1,090,175
756,109
Equity
718,401
1,724,755
696,599
1,304,181
Total Investments
$
6,887,937
$
7,429,931
$
6,058,124
$
6,201,778
52
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
In the previous table and throughout the remainder of this footnote, we aggregate our portfolio investments by type of investment, which may differ slightly from the nomenclature used by the constituent instruments defining the rights of holders of the investment, as disclosed on our Consolidated Schedules of Investments (“SOI”). The following investments are included in each category:
•First Lien Revolving Line of Credit includes our debt investments in first lien revolvers as well as our debt investments in delayed draw term loans.
•First Lien Debt includes our debt investments listed on the SOI such as first lien term loans and first lien bonds.
•1.5 Lien Debt includes our debt investments listed on the SOI as 1.5 lien term loans.
•Second Lien Debt includes our debt investments listed on the SOI as second lien term loans.
•Third Lien Debt includes our debt investments listed on the SOI as third lien term loans
•Unsecured Debt includes our debt investments listed on the SOI as unsecured.
•Subordinated Structured Notes includes our investments in the “equity” security class of CLO funds such as income notes, preference shares, and subordinated notes.
•Equity, unless specifically stated otherwise, includes our investments in preferred stock, common stock, membership interests, net profits interests, net operating income interests, net revenue interests, overriding royalty interests, escrows receivable, and warrants.
The following table shows the fair value of our investments disaggregated into the three levels of the ASC 820 valuation hierarchy as of March 31, 2022:
Level 1
Level 2
Level 3
Total
First Lien Revolving Line of Credit
$
—
$
—
$
36,214
$
36,214
First Lien Debt
—
58,977
3,502,193
3,561,170
Second Lien Debt
—
—
1,373,240
1,373,240
Unsecured Debt
—
—
5,719
5,719
Subordinated Structured Notes
—
—
728,833
728,833
Equity
—
—
1,724,755
1,724,755
Total Investments
$
—
$
58,977
$
7,370,954
$
7,429,931
53
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following table shows the fair value of our investments disaggregated into the three levels of the ASC 820 valuation hierarchy as of June 30, 2021:
Level 1
Level 2
Level 3
Total
First Lien Revolving Line of Credit
$
—
$
—
$
27,503
$
27,503
First Lien Debt
—
24,706
3,104,139
3,128,845
1.5 Lien Debt
—
—
18,164
18,164
Second Lien Debt
—
15,188
944,123
959,311
Third Lien Debt
—
—
3,950
3,950
Unsecured Debt
—
—
3,715
3,715
Subordinated Structured Notes
—
—
756,109
756,109
Equity
—
—
1,304,181
1,304,181
Total Investments
$
—
$
39,894
$
6,161,884
$
6,201,778
The following tables show the aggregate changes in the fair value of our Level 3 investments during the nine months ended March 31, 2022:
Fair Value Measurements Using Unobservable Inputs (Level 3)
Control
Investments
Affiliate
Investments
Non-Control/
Non-Affiliate
Investments
Total
Fair value as of June 30, 2021
$
2,919,717
$
356,734
$
2,885,433
$
6,161,884
Net realized gains (losses) on investments
5,304
—
(16,958)
(11,654)
Net change in unrealized gains
352,558
26,016
30,038
408,612
Net realized and unrealized gains
357,862
26,016
13,080
396,958
Purchases of portfolio investments
379,248
222,931
1,114,231
1,716,410
Payment-in-kind interest
56,168
27
4,835
61,030
Accretion (amortization) of discounts and premiums, net
439
2,026
(68,464)
(65,999)
Repayments and sales of portfolio investments
(334,929)
(190,082)
(385,223)
(910,234)
Transfers out of Level 3(2)
—
—
(9,600)
(9,600)
Transfers into Level 3(2)
—
—
20,505
20,505
Fair value as of March 31, 2022
$
3,378,505
$
417,652
$
3,574,797
$
7,370,954
First Lien Revolving Line of Credit
First Lien Debt
1.5 Lien Debt
Second Lien Debt
Third Lien Debt
Unsecured Debt
Subordinated Structured Notes
Equity
Total
Fair value as of June 30, 2021
$
27,503
$
3,104,139
$
18,164
$
944,123
$
3,950
$
3,715
$
756,109
$
1,304,181
$
6,161,884
Net realized (losses) gains on investments
—
(385)
—
—
—
10
(16,573)
5,294
(11,654)
Net change in unrealized (losses) gains
(2)
(26,884)
—
(13,597)
—
2,004
46,619
400,472
408,612
Net realized and unrealized (losses) gains
(2)
(27,269)
—
(13,597)
—
2,014
30,046
405,766
396,958
Purchases of portfolio investments
9,000
886,132
—
794,594
—
—
9,518
17,166
1,716,410
Payment-in-kind interest
1,349
57,926
—
1,755
—
—
—
—
61,030
Accretion (amortization) of discounts and premiums, net
—
6,079
—
1,929
—
—
(74,007)
—
(65,999)
Repayments and sales of portfolio investments
(1,636)
(574,467)
(18,164)
(285,671)
(3,950)
(10)
7,167
(33,503)
(910,234)
Transfers within Level 3(1)
—
38,748
—
(69,893)
—
—
—
31,145
—
Transfers out of Level 3(2)
—
(9,600)
—
—
—
—
—
—
(9,600)
Transfers into Level 3(2)
—
20,505
—
—
—
—
—
—
20,505
Fair value as of March 31, 2022
$
36,214
$
3,502,193
$
—
$
1,373,240
$
—
$
5,719
$
728,833
$
1,724,755
$
7,370,954
(1)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred.
(2)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred. During the three months ended December 31, 2021 one of our first lien notes transferred out of Level 2 to Level 3 because inputs to the valuation became unobservable. During the three months ended March 31, 2022 one of our first lien notes transferred out of Level 3 to Level 2 because inputs to the valuation became observable.
54
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following tables show the aggregate changes in the fair value of our Level 3 investments during the nine months ended March 31, 2021:
Fair Value Measurements Using Unobservable Inputs (Level 3)
Control
Investments
Affiliate
Investments
Non-Control/
Non-Affiliate
Investments
Total
Fair value as of June 30, 2020
$
2,259,292
$
187,537
$
2,785,499
$
5,232,328
Net realized gains on investments
2,953
4,469
3
7,425
Net change in unrealized gains
323,967
107,582
84,571
516,120
Net realized and unrealized gains
326,920
112,051
84,574
523,545
Purchases of portfolio investments
199,562
45,081
468,335
712,978
Payment-in-kind interest
38,502
17,742
2,506
58,750
Accretion of discounts and premiums, net
324
6,682
9,845
16,851
Repayments and sales of portfolio investments
(102,658)
(69,108)
(501,471)
(673,237)
Transfers out of Level 3(2)
—
—
(35,665)
(35,665)
Fair Value as of March 31, 2021
$
2,721,942
$
299,985
$
2,813,623
$
5,835,550
First Lien Revolving Line of Credit
First Lien Debt
1.5 Lien Debt
Second Lien Revolving Line of Credit
Second Lien Debt
Third Lien Debt
Unsecured Debt
Subordinated Structured Notes
Equity
Total
Fair value as of June 30, 2020
$
28,405
$
2,422,523
$
1,981
$
8,539
$
1,263,427
$
3,990
$
51,079
$
708,961
$
743,423
$
5,232,328
Net realized gains on investments
—
2,832
—
—
—
—
—
—
4,593
7,425
Net change in unrealized gains (losses)
54
130,107
—
—
60,691
—
(7,602)
36,794
296,076
516,120
Net realized and unrealized gains (losses)
54
132,939
—
—
60,691
—
(7,602)
36,794
300,669
523,545
Purchases of portfolio investments
4,000
473,976
14,363
101,229
—
—
—
119,410
712,978
Payment-in-kind interest
15
31,951
1,178
219
22,767
—
2,620
—
—
58,750
Accretion of discounts and premiums, net
—
3,690
—
—
1,878
—
6,439
4,844
—
16,851
Repayments and sales of portfolio investments
(5,291)
(361,562)
—
(8,758)
(240,645)
(20)
(47,241)
—
(9,720)
(673,237)
Transfers within Level 3(1)
—
314,743
—
—
(346,634)
—
—
—
31,891
—
Transfers out of Level 3(2)
—
(32,795)
—
—
(2,870)
—
—
—
—
(35,665)
Fair value as of March 31, 2021
$
27,183
$
2,985,465
$
17,522
$
—
$
859,843
$
3,970
$
5,295
$
750,599
$
1,185,673
$
5,835,550
(1)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred.
(2)Transfers are assumed to have occurred at the beginning of the quarter during which the asset was transferred. During the three months ended December 31, 2020 one of our first lien notes and one of our second lien notes transferred out of Level 3 to Level 2 because the inputs to the valuation became observable. During the three months ended March 31, 2021 two of our first lien notes transferred out of Level 3 to Level 2 because the inputs to the valuation became observable.
For the nine months ended March 31, 2022 and March 31, 2021, the net change in unrealized gains (losses) on the investments that use Level 3 inputs was $407,396 and $400,225 for investments still held as of March 31, 2022 and March 31, 2021, respectively.
Impact of the novel coronavirus (“COVID-19”) pandemic
On March 11, 2020, the World Health Organization declared the novel coronavirus (the "COVID-19") as a pandemic, and on March 13, 2020, the United States declared a national emergency with respect to COVID-19. COVID-19 had a devastating impact on the global economy, including the U.S. economy, and resulted in a global economic recession. Many states issued orders requiring the closure of non-essential businesses and/or requiring residents to stay at home. The COVID-19 pandemic and preventative measures taken to contain or mitigate its spread have caused, and are continuing to cause, business shutdowns, cancellations of events and travel, significant reductions in demand for certain goods and services, reductions in business activity and financial transactions, supply chain interruptions and overall economic and financial market instability both globally and in the United States. Such effects will likely continue for the duration of the pandemic, which is uncertain, and for some period thereafter. While several countries, as well as certain states, counties and cities in the United States, began to relax the early public health restrictions with a view to partially or fully reopening their economies, many cities, both globally and in
55
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
the United States, continue to experience, from time to time, surges in the reported number of cases and hospitalizations related to the COVID-19 pandemic. Increases in cases can and have led to the re-introduction of such restrictions in certain states in the United States and globally and could continue to lead to the re-introduction of such restrictions elsewhere. Additionally, the vaccine produced by Johnson & Johnson is currently authorized for emergency use, and the U.S. Food and Drug Administration (“FDA”) has granted full approval to the vaccines produced by Pfizer-BioNTech and Moderna, which will now be marketed as Comirnaty and Spikevax, respectively. However, it remains unclear how quickly the vaccines will be distributed nationwide and globally or when “herd immunity” will be achieved and the restrictions that were imposed to slow the spread of the virus will be lifted entirely. Various factors could lead people to continue to self-isolate and not participate in the economy at pre-pandemic levels for a prolonged period of time. Even after the COVID-19 pandemic subsides, the U.S. economy and most other major global economies may continue to experience a substantial economic downturn or recession, and our business and operations, as well as the business and operations of our portfolio companies, could be materially adversely affected by a prolonged economic downturn or recession in the United States and other major markets.
The COVID-19 pandemic (including the preventative measures taken in response thereto) has to date (i) created significant business disruption issues for certain of our portfolio companies, and (ii) materially and adversely impacted the value and performance of certain of our portfolio companies and SSN investments. The COVID-19 pandemic continues to have a particularly adverse impact on industries in which certain of our portfolio companies operate, including energy, hospitality, travel, retail and restaurants. Certain of our portfolio companies in other industries have also been significantly impacted. The COVID-19 pandemic is continuing as of the filing date of this Quarterly Report, and its extended duration may have further adverse impacts on our portfolio companies and SSN investments after March 31, 2022, including for the reasons described herein. As a result of this disruption and the pressures on their liquidity, certain of our portfolio companies have been, or may continue to be, incentivized to draw on most, if not all, of the unfunded portion of any revolving or delayed draw term loans made by us, subject to availability under the terms of such loans.
As a BDC, we are required to carry our investments at fair value as determined in good faith by our Board of Directors. Depending on market conditions, we could incur substantial losses in future periods, which could have a material adverse impact on our business, financial condition, and results of operations.
Although it is difficult to predict the extent of the impact of the COVID-19 outbreak on the underlying CLO vehicles we invest in, CLO vehicles in which we invest may fail to satisfy certain financial covenants, including with respect to adequate collateralization and/or interest coverage tests. Such failure could cause the assets of the CLO vehicle to not receive full par credit for purposes of calculation of the CLO vehicle’s overcollateralization tests and as a consequence, may lead to a reduction in such CLO vehicle’s payments to us because holders of debt senior to us may be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting CLO vehicle or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.
The COVID-19 pandemic has adversely impacted the fair value of some of our investments as of March 31, 2022, and the values assigned as of this date may differ materially from the values that we may ultimately realize with respect to our investments. The impact of the COVID-19 pandemic may not yet be fully reflected in the valuation of our investments as our valuations, and particularly valuations of private investments and private companies, are inherently uncertain, may fluctuate over short periods of time and are often based on estimates, comparisons and qualitative evaluations of private information that is often from a time period earlier, generally two to three months, than the quarter for which we are reporting. Additionally, we may not have yet received information or certifications from our portfolio companies that indicate any or the full extent of declining performance or non-compliance with debt covenants, as applicable, as a result of the COVID-19 pandemic. As a result, our valuations at March 31, 2022 may not show the complete or continuing impact of the COVID-19 pandemic and the resulting measures taken in response thereto. In addition, write downs in the value of some of our investments have reduced, and any additional write downs may further reduce, our net asset value (and, as a result, our asset coverage calculation). Accordingly, we may incur net unrealized losses or may incur realized losses after March 31, 2022, which could have a material adverse effect on our business, financial condition and results of operations.
56
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of March 31, 2022 were as follows:
Unobservable Input
Asset Category
Fair Value
Primary Valuation Approach or Technique
Input
Range
Weighted Average
First Lien Debt
$
1,656,095
Discounted cash flow (Yield analysis)
Market yield
6.8% to 16.9%
10.8%
First Lien Debt
506,564
Enterprise value waterfall (Market approach)
EBITDA multiple
5.5x to 11.0x
9.2x
First Lien Debt
134,728
Enterprise value waterfall (Market approach)
Revenue multiple
0.5x to 1.3x
1.0x
First Lien Debt
53,209
Enterprise value waterfall (Discounted cash flow)
Discount rate
7.7% to 9.7%
8.7%
First Lien Debt
12,199
Asset recovery analysis
Recoverable amount
n/a
n/a
First Lien Debt (1)
29,080
Enterprise value waterfall
Loss-adjusted discount rate
5.0% to 9.1%
7.8%
Projected loss rates
0.0% to 1.5%
0.0%
First Lien Debt (1)
140,800
Enterprise value waterfall
Discount rate (3)
8.3% to 13.9%
10.4%
First Lien Debt (2)
423,186
Enterprise value waterfall (Market approach)
Tangible book value multiple
1.4x to 3.5x
2.9x
Earnings multiple
4.8x to 6.8x
6.2x
Discount rate
12.2% to 13.2%
12.7%
First Lien Debt
20,260
Enterprise value waterfall (Market approach)
Tangible book value multiple
1.3x to 1.5x
1.4x
First Lien Debt
562,286
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.0% to 7.5%
4.3%
Second Lien Debt
1,320,499
Discounted cash flow (Yield analysis)
Market yield
8.6% to 25.0%
11.6%
Second Lien Debt
46,457
Enterprise value waterfall (Market approach)
Revenue multiple
n/a
n/a
EBITDA Multiple
0.8x to 9.5x
7.4x
Tangible book value multiple
n/a
n/a
Earnings multiple
4.8x to 5.8x
5.3x
Second Lien Debt
6,284
Asset recovery analysis
Recoverable amount
n/a
n/a
Unsecured Debt
5,719
Enterprise value waterfall (Market approach)
Revenue multiple
0.5x to 0.6x
0.5x
Subordinated Structured Notes
728,833
Discounted cash flow
Discount rate (3)
5.3% to 27.4%
16.9%
Preferred Equity
46,881
Enterprise value waterfall (Market approach)
Revenue multiple
0.8x to 1.6x
1.2x
Preferred Equity
1,195
Enterprise value waterfall (Market approach)
EBITDA multiple
4.0x to 5.0x
4.5x
Preferred Equity
14,750
Enterprise value waterfall (Market approach)
Discount rate
7.7% to 9.7%
8.7%
Common Equity/Interests/Warrants
490,278
Enterprise value waterfall (Market approach)
EBITDA multiple
1.8x to 11.0x
9.0x
Common Equity/Interests/Warrants
19,306
Enterprise value waterfall (Market approach)
Revenue multiple
0.5x to 2.0x
0.9x
Common Equity/Interests/Warrants (1)
13,471
Enterprise value waterfall
Loss-adjusted discount rate
5.0% to 9.1%
7.8%
Projected loss rates
0.0% to 1.5%
0.0%
Common Equity/Interests/Warrants (2)
24,621
Enterprise value waterfall
Discount rate (3)
8.3% to 13.9%
10.4%
Common Equity/Interests/Warrants (4)
63,193
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.0% to 7.5%
4.3%
Common Equity/Interests/Warrants
296,672
Enterprise value waterfall (Market approach)
Tangible book value multiple
3.0x to 3.5x
3.3x
Earnings multiple
5.8x to 6.8x
6.3x
Discount rate
12.2% to 13.2%
12.7%
Common Equity/Interests/Warrants
11,454
Enterprise value waterfall (Market approach)
Tangible book value multiple
2.4x to 2.8x
2.6x
Earnings multiple
4.8x to 5.8x
5.3x
Common Equity/Interests/Warrants
30,054
Enterprise value waterfall (Market approach)
Tangible book value multiple
1.3x to 1.5x
1.4x
Common Equity/Interests/Warrants
695,125
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.0% to 7.5%
4.3%
Common Equity/Interests/Warrants
5,817
Enterprise value waterfall (Discounted cash flow)
Discount rate
13.3% to 30.0%
21.2%
57
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Unobservable Input
Asset Category
Fair Value
Primary Valuation Approach or Technique
Input
Range
Weighted Average
Common Equity/Interests/Warrants
11,938
Asset recovery analysis
Recoverable amount
21.7% to 26.8%
24.3%
Total Level 3 Investments
$
7,370,954
(1)Represents an investment in a Real Estate Investment Trust subsidiary. The Enterprise Value analysis includes the fair value of our investments in such indirect subsidiary’s consumer loans purchased from online consumer lending platforms, which are valued using a discounted cash flow valuation technique.
(2)Represents an investment in a Real Estate Investment Trust subsidiary. The Enterprise Value analysis includes the fair value of our investments in such indirect subsidiary’s rated secured structured notes, which are valued using a discounted cash flow valuation technique. The key unobservable input to the discounted cash flow analysis is noted above.
(3)Represents the implied discount rate based on our internally generated single-cash flow model that is derived from the fair value estimated by the corresponding multi-path cash flow model utilized by the independent valuation firm.
(4)Represents Residual Profit Interests in Real Estate Investments.
58
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The ranges of unobservable inputs used in the fair value measurement of our Level 3 investments as of June 30, 2021 were as follows:
Unobservable Input
Asset Category
Fair Value
Primary Valuation Approach or Technique
Input
Range
Weighted Average
First Lien Debt
$
1,403,795
Discounted cash flow (Yield analysis)
Market yield
4.4% to 19.5%
9.2%
First Lien Debt
436,000
Enterprise value waterfall (Market approach)
EBITDA multiple
5.5x to 11.5x
9.7x
First Lien Debt
105,212
Enterprise value waterfall (Market approach)
Revenue multiple
0.8x to 1.6x
1.3x
First Lien Debt
75,406
Enterprise value waterfall (Discounted cash flow)
Discount rate
7.7% to 9.7%
8.7%
First Lien Debt
12,760
Asset recovery analysis
Recoverable amount
n/a
n/a
First Lien Debt (1)
6,600
Enterprise value waterfall
Loss-adjusted discount rate
3.9% to 9.5%
7.8%
Projected loss rates
0.0% to 2.4%
0.1%
First Lien Debt (2)
90,200
Enterprise value waterfall
Discount rate (3)
6.8% to 12.4%
9.2%
First Lien Debt
324,708
Enterprise value waterfall (Market approach)
Tangible book value multiple
2.9x to 3.1x
3.0x
Earnings multiple
6.5x to 7.5x
7.0x
Discount rate
13.0% to 14.0%
13.5%
First Lien Debt
20,260
Enterprise value waterfall (Market approach)
Tangible book value multiple
1.2x to 1.4x
1.3x
First Lien Debt
656,701
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.8% to 8.1%
5.9%
1.5 Lien Debt
18,164
Discounted cash flow (Yield analysis)
Market yield
4.9% to 5.7%
5.3%
Second Lien Debt
869,050
Discounted cash flow (Yield analysis)
Market yield
6.7% to 25.0%
10.2%
Second Lien Debt
68,137
Enterprise value waterfall (Market approach)
Tangible book value multiple
2.2x to 2.6x
2.4x
Earnings multiple
6.0x to 7.0x
6.5x
Second Lien Debt
6,936
Asset recovery analysis
Recoverable amount
n/a
n/a
Third Lien Debt
3,950
Enterprise value waterfall (Market approach)
Revenue multiple
0.4x to 0.5x
0.5x
Unsecured Debt
3,715
Enterprise value waterfall (Market approach)
EBITDA multiple
7.5x to 8.5x
8.0x
Subordinated Structured Notes
756,109
Discounted cash flow
Discount rate (3)
0.1% to 31.0%
21.8%
Preferred Equity
19,857
Enterprise value waterfall (Market approach)
Revenue multiple
0.8x to 1.4x
1.1x
Preferred Equity
3,199
Enterprise value waterfall (Market approach)
EBITDA multiple
7.1x to 9.1x
8.1x
Common Equity/Interests/Warrants
507,539
Enterprise value waterfall (Market approach)
EBITDA multiple
5.5x to 11.5x
9.1x
Common Equity/Interests/Warrants
5,824
Enterprise value waterfall (Market approach)
Revenue multiple
0.4x to 0.5x
0.5x
Common Equity/Interests/Warrants (1)
4,068
Enterprise value waterfall
Loss-adjusted discount rate
3.9% to 9.5%
7.8%
Projected loss rates
0.0% to 2.4%
0.1%
Common Equity/Interests/Warrants (2)
18,108
Enterprise value waterfall
Discount rate (3)
6.8% to 12.4%
9.2%
Common Equity/Interests/Warrants
379,572
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.8% to 8.1%
5.9%
Common Equity/Interests/Warrants
267,648
Enterprise value waterfall (Market approach)
Tangible book value multiple
2.9x to 3.1x
3.0x
Earnings multiple
6.5x to 7.5x
7.0x
Discount rate
13.0% to 14.0%
13.5%
Common Equity/Interests/Warrants
9,886
Enterprise value waterfall (Market approach)
Tangible book value multiple
2.2x to 2.6x
2.4x
Earnings multiple
6.0x to 7.0x
6.5x
Common Equity/Interests/Warrants
27,733
Enterprise value waterfall (Market approach)
Tangible book value multiple
1.2x to 1.4x
1.3x
Common Equity/Interests/Warrants (4)
34,507
Enterprise value waterfall (NAV analysis)
Capitalization Rate
3.8% to 8.1%
5.9%
59
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Unobservable Input
Asset Category
Fair Value
Primary Valuation Approach or Technique
Input
Range
Weighted Average
Common Equity/Interests/Warrants
14,524
Enterprise value waterfall (Discounted cash flow)
Discount rate
7.7% to 30.0%
13.8%
Common Equity/Interests/Warrants
11,717
Asset recovery analysis
Recoverable amount
n/a
n/a
Total Level 3 Investments
$
6,161,884
(1)Represents an investment in a Real Estate Investment Trust subsidiary. The Enterprise Value analysis includes the fair value of our investments in such indirect subsidiary’s consumer loans purchased from online consumer lending platforms, which are valued using a discounted cash flow valuation technique.
(2)Represents an investment in a Real Estate Investment Trust subsidiary. The Enterprise Value analysis includes the fair value of our investments in such indirect subsidiary’s rated secured structured notes, which are valued using a discounted cash flow valuation technique. The key unobservable input to the discounted cash flow analysis is noted above.
(3)Represents the implied discount rate based on our internally generated single-cash flow model that is derived from the fair value estimated by the corresponding multi-path cash flow model utilized by the independent valuation firm.
(4)Represents Residual Profit Interests in Real Estate Investments.
Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, management and the independent valuation firm look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. In determining the range of values for debt instruments where market quotations are not available, except CLOs and debt investments in controlling portfolio companies, management and the independent valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted cash flow technique was then applied using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of values for debt investments of controlled companies and equity investments, the enterprise value was determined by applying a market approach such as using earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, net income and/or book value multiples for similar guideline public companies and/or similar recent investment transactions and/or an income approach, such as the discounted cash flow technique. The enterprise value technique may also be used to value debt investments which are credit impaired. For stressed debt and equity investments, asset recovery analysis was used.
In determining the range of values for our investments in CLOs, the independent valuation firm uses a discounted multi-path cash flow model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations to generate probability-weighted (i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market and certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the corresponding multi-path cash flow model.
Our portfolio consists of residual interests and debt investments in CLOs, which involve a number of significant risks. CLOs are typically very highly levered (10 - 14 times), and therefore the residual interest tranches that we invest in are subject to a higher degree of risk of total loss. In particular, investors in CLO residual interests indirectly bear risks of the underlying loan investments held by such CLOs. We generally have the right to receive payments only from the CLOs, and generally do not have direct rights against the underlying borrowers or the entity that sponsored the CLOs. While the CLOs we target generally enable the investor to acquire interests in a pool of senior loans without the expenses associated with directly holding the same investments, the prices of indices and securities underlying our CLOs will rise or fall. These prices (and, therefore, the prices of the CLOs) will be influenced by the same types of political and economic events that affect issuers of securities and capital markets generally. The failure by a CLO investment in which we invest to satisfy financial covenants, including with respect to adequate collateralization and/or interest coverage tests, could lead to a reduction in its payments to us. In the event that a CLO fails certain tests, holders of debt senior to us would be entitled to additional payments that would, in turn, reduce the payments we would otherwise be entitled to receive. Separately, we may incur expenses to the extent necessary to seek recovery upon default or to negotiate new terms with a defaulting CLO or any other investment we may make. If any of these occur, it could materially and adversely affect our operating results and cash flows.
60
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The interests we have acquired in CLOs are generally thinly traded or have only a limited trading market. CLOs are typically privately offered and sold, even in the secondary market. As a result, investments in CLOs may be characterized as illiquid securities. In addition to the general risks associated with investing in debt securities, CLO residual interests carry additional risks, including, but not limited to: (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments; (ii) the quality of the collateral may decline in value or default; (iii) our investments in CLO tranches will likely be subordinate to other senior classes of note tranches thereof; and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the CLO investment or unexpected investment results. Our net asset value may also decline over time if our principal recovery with respect to CLO residual interests is less than the cost of those investments. Our CLO investments and/or the CLOs’ underlying senior secured loans may prepay more quickly than expected, which could have an adverse impact on our value.
An increase in LIBOR would materially increase the CLO’s financing costs. Since most of the collateral positions within the CLOs have LIBOR floors, there may not be corresponding increases in investment income (if LIBOR increases but stays below the LIBOR floor rate of such investments) resulting in materially smaller distribution payments to the residual interest investors.
On March 5, 2021, the FCA announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); (ii) the overnight and 12-month US LIBOR settings would cease to exist after June 30, 2023; and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them.
We hold more than a 10% interest in certain foreign corporations that are treated as controlled foreign corporations (“CFC”) for U.S. federal income tax purposes (including our residual interest tranche investments in CLOs). Therefore, we are treated as receiving a deemed distribution (taxable as ordinary income) each year from such foreign corporations in an amount equal to our pro rata share of the corporation’s income for that tax year (including both ordinary earnings and capital gains). We are required to include such deemed distributions from a CFC in our taxable income and we are required to distribute at least 90% of such income to maintain our RIC status, regardless of whether or not the CFC makes an actual distribution during such year.
If we acquire shares in “passive foreign investment companies” (“PFICs”) (including residual interest tranche investments in CLOs that are PFICs), we may be subject to federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend to our stockholders. Certain elections may be available to mitigate or eliminate such tax on excess distributions, but such elections (if available) will generally require us to recognize our share of the PFIC’s income for each year regardless of whether we receive any distributions from such PFICs. We must nonetheless distribute such income to maintain our status as a RIC.
Legislation known as FATCA and regulations thereunder impose a withholding tax of 30% on payments of U.S. source interest and dividends, to certain non-U.S. entities, including certain non-U.S. financial institutions and investment funds, unless such non-U.S. entity complies with certain reporting requirements regarding its United States account holders and its United States owners. Most CLOs in which we invest will be treated as non-U.S. financial entities for this purpose, and therefore will be required to comply with these reporting requirements to avoid the 30% withholding. If a CLO in which we invest fails to properly comply with these reporting requirements, it could reduce the amounts available to distribute to residual interest and junior debt holders in such CLO vehicle, which could materially and adversely affect our operating results and cash flows.
If we are required to include amounts in income prior to receiving distributions representing such income, we may have to sell some of our investments at times and/or at prices management would not consider advantageous, raise additional debt or equity capital or forgo new investment opportunities for this purpose.
The significant unobservable input used to value our investments based on the yield technique and discounted cash flow technique is the market yield (or applicable discount rate) used to discount the estimated future cash flows expected to be received from the underlying investment, which includes both future principal and interest/dividend payments. Increases or decreases in the market yield (or applicable discount rate) would result in a decrease or increase, respectively, in the fair value measurement. Management and the independent valuation firms consider the following factors when selecting market yields or discount rates: risk of default, rating of the investment and comparable company investments, and call provisions.
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The significant unobservable inputs used to value our investments based on the EV analysis may include market multiples of specified financial measures such as EBITDA, net income, or book value of identified guideline public companies, implied valuation multiples from precedent M&A transactions, and/or discount rates applied in a discounted cash flow technique. The independent valuation firm identifies a population of publicly traded companies with similar operations and key attributes to that of the portfolio company. Using valuation and operating metrics of these guideline public companies and/or as implied by relevant precedent transactions, a range of multiples of the latest twelve months EBITDA, or other measure such as net income or book value, is typically calculated. The independent valuation firm utilizes the determined multiples to estimate the portfolio company’s EV generally based on the latest twelve months EBITDA of the portfolio company (or other meaningful measure). Increases or decreases in the multiple would result in an increase or decrease, respectively, in EV which would result in an increase or decrease in the fair value measurement of the debt of controlled companies and/or equity investment, as applicable. In certain instances, a discounted cash flow analysis may be considered in estimating EV, in which case, discount rates based on a weighted average cost of capital and application of the capital asset pricing model may be utilized.
The significant unobservable input used to value our private REIT investments based on the net asset value analysis is the capitalization rate applied to the earnings measure of the underlying property. Increases or decreases in the capitalization rate would result in a decrease or increase, respectively, in the fair value measurement.
Changes in market yields, discount rates, capitalization rates or EBITDA multiples, each in isolation, may change the fair value measurement of certain of our investments. Generally, an increase in market yields, discount rates or capitalization rates, or a decrease in EBITDA (or other) multiples may result in a decrease in the fair value measurement of certain of our investments.
Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value of our investments may fluctuate from period to period. Additionally, the fair value of our investments may differ significantly from the values that would have been used had a ready market existed for such investments and may differ materially from the values that we may ultimately realize. Further, such investments are generally subject to legal and other restrictions on resale or otherwise are less liquid than publicly traded securities. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we could realize significantly less than the value at which we have recorded it.
In addition, changes in the market environment and other events that may occur over the life of the investments may cause the gains or losses ultimately realized on these investments to be different than the unrealized gains or losses reflected in the currently assigned valuations.
During the nine months ended March 31, 2022, the valuation methodology for Dunn Paper Holdings, Inc. (“Dunn Paper”) changed to remove the yield analysis and incorporate the Current Value Method (“CVM”) approach, given Dunn Paper’s current liquidity and declining performance. As a result, the fair value of our investment in Dunn Paper decreased to $9,457 as of March 31, 2022, a discount of $1,997 to its amortized cost, compared to the unrealized discount of $82 recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for First Brands Group LLC (“First Brands”) for the First Lien Term Loan changed to remove market quotes, which were less active in the current period. As a result of widened credit market spreads, the fair value of our investment in First Brands First Lien Term Loan decreased to $16,474 as of March 31, 2022, which is equal to its amortized cost, compared to the $153 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for Global Tel*Link Corporation (“GTL”) for the First Lien Term Loan changed to incorporate market quotes, which were more active in the current period. As a result of a decrease in the quoted price of the First Lien Term Loan, the fair value of our investment in GTL First Lien Term Loan decreased to $9,596 as of March 31, 2022, a premium of $113 from its amortized cost, compared to the $289 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for K&N Parent, Inc. (“K&N”) for the Second Lien Term Loan changed to incorporate the CVM approach due to a decline in enterprise value. As a result, our investment in K&N Second Lien Term Loan decreased to $18,001 as of March 31, 2022, a discount of $7,676 from its amortized cost, compared to the $272 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for The Octave Music Group, Inc (“Octave”) changed to incorporate the expected repayment of our investment, which occurred on April 1, 2022. As a result, the fair value of our investment in Octave decreased to $22,093 as of March 31, 2022, a premium of $236 from its amortized cost, compared to the $292 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for Research Now Group, Inc (“Research Now”) for the First Lien Term Loan changed to remove the yield method due to increased trading activity and liquidity of market quotes.
62
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
As a result of widening market spreads and a decrease in market quotes, the fair value of our investment in Research Now First Lien Term Loan decreased to $9,479 as of March 31, 2022, a premium of $117 from its amortized cost, compared to the $267 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for Securus Technologies (‘Securus”) for the Second Lien Term Loan changed to incorporate market quotes, which were more active in the current period. As a result of credit spread tightening and decreased leverage, the fair value of our investment in Securus Second Lien Term Loan increased to $50,007 as of March 31, 2022, a discount of $565 from its amortized cost, compared to the $1,233 unrealized loss recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology for Sorenson Communications, LLC (“Sorenson”) changed to remove market quotes, which were less active in the current period. As a result of widening market spreads, the fair value of our investment in Sorenson decreased to $16,200 as of March 31, 2022, a premium of $144 to its amortized cost, compared to the $171 unrealized appreciation recorded at June 30, 2021.
During the nine months ended March 31, 2022, the valuation methodology Town & Country Holdings, Inc. (“Town & Country”) changed to incorporate a combined yield method due to near term maturity. As a result of the economics from a recent amendment, the fair value of our investment in Town & Country increased to $163,165 as of March 31, 2022, which is equal to its amortized cost, compared to a fair value of $160,145 as of June 30, 2021, also equal to its amortized cost.
During the nine months ended March 31, 2022, the valuation methodology for Universal Fiber Systems, LLC (“Universal Fiber”) changed to incorporate the expected repayment of our investment, which occurred on April 7, 2022. As a result of the company’s performance, the fair value of our investment in Universal Fiber increased to $37,000, a premium of $53 from its amortized cost, compared to the $353 unrealized loss recorded at June 30, 2021.
During the nine months ended March 31, 2022, we received partial repayments of $289,882 of our loans previously outstanding with NPRC and provided $268,547 of debt financing and $11,620 of equity financing to NPRC for the acqusition of real estate properties, to fund capital expenditures for existing real estate properties, to provide working capital, to fund purchases of rated secured structured notes, and to support the purchase of high yield corporate debt.
The online consumer loan investments held by certain of NPRC’s wholly owned subsidiaries are unsecured obligations of individual borrowers that are issued in amounts ranging from $1 to $50, with fixed terms ranging from 36 to 84 months. As of March 31, 2022, the outstanding investment in online consumer loans by certain of NPRC’s wholly-owned subsidiaries was comprised of 626 individual loans, residual interest in four securitizations, and one high yield corporate bond, and had an aggregate fair value of $40,279. The average outstanding individual loan balance is approximately $4 and the loans mature on dates ranging from April 1, 2022 to April 19, 2025 with a weighted-average outstanding term of 14 months as of March 31, 2022. Fixed interest rates range from 6.0% to 36.0% with a weighted-average current interest rate of 20.0%. As of March 31, 2022, our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair value of $29,080.
As of March 31, 2022, based on outstanding principal balance, 24.1% of the portfolio was invested in super prime loans (borrowers with a Fair Isaac Corporation (“FICO”) score, of 720 or greater), 38.5% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 37.5% of the portfolio in near prime loans (borrowers with a FICO score of 580 to 659, a portion of which are considered sub-prime).
Loan Type
Outstanding Principal Balance
Fair Value
Interest Rate Range
Weighted Average Interest Rate*
Super Prime
$
545
$
539
8.0% - 20.5%
12.4%
Prime
871
841
6.0% - 25.0%
18.3%
Near Prime
848
854
17.0% - 36.0%
26.7%
*Weighted by outstanding principal balance of the online consumer loans.
The rated secured structured note investments held by certain of NPRC’s wholly owned subsidiaries are subordinated debt interests in broadly syndicated loans managed by established collateral management teams with many years of experience in the industry. As of March 31, 2022, the outstanding investment in rated secured structured notes by certain of NPRC’s wholly owned subsidiaries was comprised of 58 investments with a fair value of $303,060 and face value of $315,813. The average outstanding note is approximately $5,445 with an expected maturity date ranging from April 2026 to January 2032 and weighted-average expected maturity of 7 years as of March 31, 2022. Coupons range from three-month LIBOR (“3ML”) plus
63
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
5.31% to 9.45% with a weighted-average coupon of 3ML + 7.1%. As of March 31, 2022, our investment in NPRC and its wholly-owned subsidiaries relating to rated secured structured notes had a fair value of $140,800.
As of March 31, 2022, based on outstanding notional balance, 17.8% of the portfolio was invested in Single - B rated tranches and 82.2% of the portfolio in BB rated tranches.
As of March 31, 2022, our investment in NPRC and its wholly owned subsidiaries had an amortized cost of $743,996 and a fair value of $1,528,576, including our investment in online consumer lending and rated secured structured notes as discussed above. The fair value of $1,358,696 related to NPRC’s real estate portfolio was comprised of forty-seven multi-family properties, eight student housing properties and three commercial properties. The following table shows the location, acquisition date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as of March 31, 2022.
No.
Property Name
City
Acquisition Date
Purchase Price
Mortgage Outstanding
1
Filet of Chicken
Forest Park, GA
10/24/2012
$
7,400
$
—
2
Arlington Park Marietta, LLC
Marietta, GA
5/8/2013
14,850
13,494
3
Taco Bell, OK
Yukon, OK
6/4/2014
1,719
—
4
Taco Bell, MO
Marshall, MO
6/4/2014
1,405
—
5
Abbie Lakes OH Partners, LLC
Canal Winchester, OH
9/30/2014
12,600
15,144
6
Kengary Way OH Partners, LLC
Reynoldsburg, OH
9/30/2014
11,500
15,310
7
Lakeview Trail OH Partners, LLC
Canal Winchester, OH
9/30/2014
26,500
29,207
8
Lakepoint OH Partners, LLC
Pickerington, OH
9/30/2014
11,000
16,620
9
Sunbury OH Partners, LLC
Columbus, OH
9/30/2014
13,000
16,852
10
Heatherbridge OH Partners, LLC
Blacklick, OH
9/30/2014
18,416
24,093
11
Jefferson Chase OH Partners, LLC
Blacklick, OH
9/30/2014
13,551
18,749
12
Goldenstrand OH Partners, LLC
Hilliard, OH
10/29/2014
7,810
11,431
13
SSIL I, LLC
Aurora, IL
11/5/2015
34,500
25,488
14
Vesper Tuscaloosa, LLC
Tuscaloosa, AL
9/28/2016
54,500
42,748
15
Vesper Iowa City, LLC
Iowa City, IA
9/28/2016
32,750
24,654
16
Vesper Corpus Christi, LLC
Corpus Christi, TX
9/28/2016
14,250
10,726
17
Vesper Campus Quarters, LLC
Corpus Christi, TX
9/28/2016
18,350
14,077
18
Vesper College Station, LLC
College Station, TX
9/28/2016
41,500
31,837
19
Vesper Kennesaw, LLC
Kennesaw, GA
9/28/2016
57,900
50,704
20
Vesper Statesboro, LLC
Statesboro, GA
9/28/2016
7,500
7,480
21
Vesper Manhattan KS, LLC
Manhattan, KS
9/28/2016
23,250
14,679
22
9220 Old Lantern Way, LLC
Laurel, MD
1/30/2017
187,250
153,580
23
7915 Baymeadows Circle Owner, LLC
Jacksonville, FL
10/31/2017
95,700
76,560
24
8025 Baymeadows Circle Owner, LLC
Jacksonville, FL
10/31/2017
15,300
12,240
25
23275 Riverside Drive Owner, LLC
Southfield, MI
11/8/2017
52,000
54,591
26
23741 Pond Road Owner, LLC
Southfield, MI
11/8/2017
16,500
18,934
27
150 Steeplechase Way Owner, LLC
Largo, MD
1/10/2018
44,500
36,668
28
Olentangy Commons Owner LLC
Columbus, OH
6/1/2018
113,000
92,876
29
Villages of Wildwood Holdings LLC
Fairfield, OH
7/20/2018
46,500
39,525
30
Falling Creek Holdings LLC
Richmond, VA
8/8/2018
25,000
25,374
31
Crown Pointe Passthrough LLC
Danbury, CT
8/30/2018
108,500
89,400
32
Lorring Owner LLC
Forestville, MD
10/30/2018
58,521
47,680
33
Hamptons Apartments Owner, LLC
Beachwood, OH
1/9/2019
96,500
79,520
34
5224 Long Road Holdings, LLC
Orlando, FL
6/28/2019
26,500
21,200
35
Druid Hills Holdings LLC
Atlanta, GA
7/30/2019
96,000
79,104
36
Bel Canto NPRC Parcstone LLC
Fayetteville, NC
10/15/2019
45,000
42,793
37
Bel Canto NPRC Stone Ridge LLC
Fayetteville, NC
10/15/2019
21,900
21,545
38
Sterling Place Holdings LLC
Columbus, OH
10/28/2019
41,500
34,196
39
SPCP Hampton LLC
Dallas, TX
11/2/2020
36,000
27,590
40
Palmetto Creek Holdings LLC
North Charleston, SC
11/10/2020
33,182
25,865
41
Valora at Homewood Holdings LLC
Homewood, AL
11/19/2020
81,250
63,844
64
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
No.
Property Name
City
Acquisition Date
Purchase Price
Mortgage Outstanding
42
NPRC Fairburn LLC
Fairburn, GA
12/14/2020
52,140
43,900
43
NPRC Grayson LLC
Grayson, GA
12/14/2020
47,860
40,500
44
NPRC Taylors LLC
Taylors, SC
1/27/2021
18,762
14,075
45
Parkside at Laurel West Owner LLC
Spartanburg, SC
2/26/2021
57,005
42,025
46
Willows at North End Owner LLC
Spartanburg, SC
2/26/2021
23,255
19,000
47
SPCP Edge CL Owner LLC
Webster, TX
3/12/2021
34,000
25,496
48
Jackson Pear Orchard LLC
Ridgeland, MS
6/28/2021
50,900
38,175
49
Jackson Lakeshore Landing LLC
Ridgeland, MS
6/28/2021
22,600
16,950
50
Jackson Reflection Pointe LLC
Flowood, MS
6/28/2021
45,100
31,050
51
Jackson Crosswinds LLC
Pearl, MS
6/28/2021
41,400
33,825
52
Elliot Apartments Norcross, LLC
Norcross, GA
11/30/2021
128,000
98,800
53
Orlando 442 Owner, LLC (West Vue Apartments)
Orlando, FL
12/30/2021
97,500
73,000
54
NPRC Wolfchase LLC
Memphis, TN
3/18/2022
82,100
60,000
55
NPRC Twin Oaks LLC
Hattiesburg. MS
3/18/2022
44,850
33,830
56
NPRC Lancaster LLC
Birmingham, AL
3/18/2022
37,550
28,350
57
NPRC Rutland LLC
Macon, GA
3/18/2022
29,750
22,500
58
Southport Owner LLC (Southport Crossing)
Indianapolis, IN
3/29/2022
48,100
36,075
2,525,726
2,083,929
On September 28, 2020, Spartan Energy Services, LLC fully repaid the $26,193 Senior Secured Term Loan B receivable to us at par. We recorded a realized gain of $2,832 as a result of this transaction.
On December 11, 2020, we sold our 11.51% Class A voting interest in Edmentum Holdings. We recorded a realized gain of $3,724 as a result of this transaction.
On October 18, 2021, we received proceeds for our investment in Sudbury Mill CLO Ltd. of $3,772. We recorded a realized loss of $9,406 as a result of this transaction as we do not expect any further proceeds.
On December 15, 2021, we received $176 of escrow proceeds related to Edmentum Holdings, realizing a gain of the same amount.
On January 18, 2022, we received proceeds for our investment in Sudbury Mill CLO Ltd. of $516. We recorded a realized gain of $516 as a result of this transaction.
On January 21, 2022, we sold our investment in Brookside Mill CLO Ltd. for proceeds of $6,443. We recorded a realized loss of $7,683 as a result of this transaction.
On March 18, 2022, we sold our First Lien Term Loan for Dunn Paper, Inc. for proceeds of $4,055. We recorded a realized loss of $385 as a result of this transaction.
On March 29, 2022, we received a dividend distribution for our Common Stock in NMMB, Inc. in the amount of $22,152. We recorded a realized gain of $5,294 as a result of this transaction.
As of March 31, 2022, $4,245,990 of our loans to portfolio companies, at fair value, bear interest at floating rates and have LIBOR or SOFR floors ranging from 0.0% - 3.0%. As of March 31, 2022, $730,353 of our loans to portfolio companies, at fair value, bear interest at fixed rates ranging from 1.0% - 22.0%. As of June 30, 2021, $3,462,243 of our loans to portfolio companies, at fair value, bore interest at floating rates and have LIBOR floors ranging from 0.0% to 3.0%. As of June 30, 2021, $679,245 of our loans to portfolio companies, at fair value, bore interest at fixed rates ranging from 8.25% to 22.0%.
As of March 31, 2022 and June 30, 2021, the cost basis of our loans on non-accrual status amounted to $169,949 and $169,949, respectively, with fair value of $30,200 and $38,751, respectively. The fair values of these investments represent approximately 0.4% and 0.6% of our total assets at fair value as of March 31, 2022 and June 30, 2021, respectively.
65
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 7.25%. As of March 31, 2022 and June 30, 2021, we had $43,351 and $67,385, respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as of March 31, 2022 and June 30, 2021.
We have guaranteed $2,737 in standby letters of credit issued through a financial intermediary and $1,835 of equipment lease obligations on behalf of InterDent, Inc. (“InterDent”) as of March 31, 2022. Under these arrangements, we would be required to make payments to the financial intermediary or equipment lease provider, respectively, if InterDent was to default on their related payment obligations. As of March 31, 2022, we have not recorded a liability on the statement of assets and liabilities for these guarantees as the likelihood of default on the standby letters of credit or equipment lease is deemed to be remote.
Unconsolidated Significant Subsidiaries
Our investments are generally in small and mid-sized companies in a variety of industries. In accordance with Regulation S-X 3-09 and Regulation S-X 4-08(g), we must determine which of our unconsolidated controlled portfolio companies are considered “significant subsidiaries,” if any, as defined in Rule 1-02(w)(2) for BDC’s and closed end investment companies. Regulation S-X 3-09 requires separate audited financial statements of an unconsolidated subsidiary in an annual report. Regulation S-X 4-08(g) requires summarized financial information in an annual report.
Pursuant to Regulation S-X 10-01(b), Interim Financial Statements, summarized interim income statement information is required for an unconsolidated subsidiary within a quarterly report if the unconsolidated subsidiary would otherwise require separate audited financial statements within an annual report pursuant to Regulation S-X 3-09.
During the three months ended March 31, 2022, NPRC was deemed to be a significant subsidiary. The following table shows summarized income statement information for NPRC for the periods included in this quarterly report:
Three Months Ended March 31,
Nine Months Ended March 31,
Summary Statement of Operations
2022
2021
2022
2021
Total income
$
104,120
$
95,906
$
630,858
$
242,930
Operating expenses
39,541
42,568
131,242
113,511
Operating income
64,579
53,338
499,616
129,419
Interest expense
(59,607)
(45,090)
(175,038)
(129,991)
Depreciation and amortization
(28,154)
(30,524)
(83,201)
(73,841)
Fair value adjustment
(2,274)
1,449
960
6,657
Net income (loss)
$
(25,456)
$
(20,827)
$
242,337
$
(67,756)
66
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Note 4. Revolving Credit Facility
On August 29, 2014, we renegotiated our previous credit facility and closed an expanded five and a half year revolving credit facility (the “2014 Facility”). The lenders had extended commitments of $885,000 under the 2014 Facility as of June 30, 2018. The 2014 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate. Interest on borrowings under the 2014 Facility was one-month LIBOR plus 225 basis points. Additionally, the lenders charged a fee on the unused portion of the 2014 Facility equal to either 50 basis points if at least 35% of the credit facility was drawn or 100 basis points otherwise.
On August 1, 2018, we renegotiated the 2014 Facility and closed an expanded five and a half year revolving credit facility (the “2018 Facility”). The lenders have extended commitments of $1,132,500 as of June 30, 2019. The 2018 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On September 9, 2019, we amended the 2018 Facility and closed an expanded revolving credit facility (the “2019 Facility”). The lenders had extended commitments of $1,077,500 as of March 31, 2021. The 2019 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On April 28, 2021, we amended the 2019 Facility and closed an expanded five year revolving credit facility (the “2021 Facility” and collectively with the 2014 Facility, the 2018 Facility, and the 2019 Facility, the “Revolving Credit Facility”). The lenders had extended commitments of $1,500,000 as of March 31, 2022. The 2021 Facility includes an accordion feature which allows commitments to be increased up to $1,500,000 in the aggregate. The Revolving Credit Facility matures on April 27, 2026. It includes a revolving period that extends through April 27, 2025, followed by an additional one-year amortization period, with distributions allowed to Prospect after the completion of the revolving period. During such one-year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one-year amortization period, the remaining balance will become due, if required by the lenders.
The Revolving Credit Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The Revolving Credit Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the Revolving Credit Facility. The Revolving Credit Facility also requires the maintenance of a minimum liquidity requirement. As of March 31, 2022, we were in compliance with the applicable covenants.
Interest on borrowings under the 2021 Facility is one-month LIBOR plus 205 basis points. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 40 basis points if more than 60% of the credit facility is drawn, or 70 basis points if more than 35% and an amount less than or equal to 60% of the credit facility is drawn, or 150 basis points if an amount less than or equal to 35% of the credit facility is drawn. The 2021 Facility requires us to pledge assets as collateral in order to borrow under the credit facility.
For the nine months ended March 31, 2022 and March 31, 2021, the average stated interest rate (i.e., rate in effect plus the spread) and average outstanding borrowings for the Revolving Credit Facility were as follows:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Average stated interest rate
2.14%
2.32%
2.14%
2.35%
Average outstanding balance
$737,280
$373,734
$546,080
$376,646
As of March 31, 2022 and June 30, 2021, we had $730,410 and $640,853, respectively, available to us for borrowing under the Revolving Credit Facility, net of $699,440 and $356,937 outstanding borrowings as of the respective balance sheet dates. As of March 31, 2022, the investments, including cash and cash equivalents, used as collateral for the Revolving Credit Facility had an aggregate fair value of $2,559,645, which represents 34.3% of our total investments, including cash and cash equivalents. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and, as such, these investments are not available to our general creditors. As additional eligible investments are transferred to PCF and pledged under the Revolving Credit Facility, PCF will generate additional availability up to the current commitment amount of $1,500,000. The release of any assets from PCF requires the approval of the facility agent.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
In connection with the origination and amendments of the Revolving Credit Facility, we incurred $18,746 of new fees and $7,509 were carried over from the previous facilities, all of which are being amortized over the term of the facility in accordance with ASC 470-50. As of March 31, 2022, $11,504 remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $6,452 and $4,509, respectively, of interest costs, unused fees and amortization of financing costs on the Revolving Credit Facility as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $16,153 and $13,772, respectively, of interest costs, unused fees and amortization of financing costs on the Revolving Credit Facility as interest expense.
Note 5. Convertible Notes
2022 Notes
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “Original 2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Original 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2017. Total proceeds from the issuance of the Original 2022 Notes, net of underwriting discounts and offering costs, were $218,010. On May 18, 2018, we issued an additional $103,500 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “Additional 2022 Notes,” and together with the Original 2022 Notes, the “2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Additional 2022 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2022 Notes and bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2018. Total proceeds from the issuance of the Additional 2022 Notes, net of underwriting discounts and offering costs, were $100,749.
On October 18, 2019, we repurchased $22,941 aggregate principal amount of the 2022 Notes at a price of $102.8 including commissions. As a result of this transaction, we recorded a loss of $1,072 in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs. On November 7, 2019, we commenced a tender offer to purchase for cash up to $50,000 aggregate principal amount of the 2022 Notes (“2022 Notes November Tender Offer”). On December 7, 2019, $13,432 aggregate principal amount of the 2022 Notes, representing 4.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes November Tender Offer resulted in our recognizing a loss of $599, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
On December 23, 2019, we commenced a tender offer to purchase for cash up to $25,000 aggregate principal amount of the 2022 Notes (“2022 Notes December Tender Offer”). On January 22, 2020, $1,302 aggregate principal amount of the 2022 Notes, representing 0.5% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December Tender Offer resulted in our recognizing a loss of $51 during the three months ended March 31, 2020. During the three months ended March 31, 2020, we repurchased an additional $32,585 aggregate principal amount of the 2022 Notes at a weighted average price of $89.1 including commissions. As a result of this transaction, we recorded a gain of $3,045, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
On July 23, 2020, we commenced a tender offer to purchase for cash up to $100,000 aggregate principal amount of the 2022 Notes (“2022 Notes July Tender Offer”). On August 19, 2020, $29,420 aggregate principal amount of the 2022 Notes, representing 11.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes July Tender Offer resulted in our recognizing a loss of $396 during the three months ended September 30, 2020.
On September 3, 2020, we commenced a tender offer to purchase for cash up to $228,820 aggregate principal amount of the 2022 Notes at the purchase price of $101.00, plus accrued and unpaid interest (“2022 Notes September Tender Offer”). On October 1, 2020, $6,035 aggregate principal amount of the 2022 Notes, representing 2.64% of the previously outstanding 2022 Notes, were validly tendered and accepted. On October 19, 2020, we commenced a tender offer to purchase for cash any and all of the $222,785 aggregate principal amount outstanding of the 2022 Notes at the purchase price of $102.625, plus accrued and unpaid interest (“2022 Notes October Tender Offer”). On November 16, 2020, $59,863 aggregate principal amount of the 2022 Notes, representing 26.87% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes September Tender Offer and the 2022 Notes October Tender Offer resulted in our recognizing a loss of $2,433 during the three months ended December 31, 2020.
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
On December 16, 2020, we commenced a tender offer to purchase for cash any and all of the $162,922 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.50, plus accrued and unpaid interest (“2022 Notes December 2020 Tender Offer”). On January 15, 2021, $26,694 aggregate principal amount of the 2022 Notes, representing 16.38% of the previously outstanding 2022 Notes, were validly tendered and accepted. On February 1, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.00, plus accrued and unpaid interest (“2022 Notes February 2021 Tender Offer”). On March 2, 2021, $25,123 aggregate principal amount of the 2022 Notes, representing 18.44% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December 2020 Tender Offer and the 2022 Notes February 2021 Tender Offer resulted in our recognizing a loss of $2,225 during the three months ended March 31, 2021.
On March 16, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.00, plus accrued and unpaid interest (“2022 Notes March 2021 Tender Offer”). On April 13, 2021, $50 aggregate principal amount of the 2022 Notes, representing 0.05% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes March 2021 Tender Offer resulted in our recognizing a loss of $1.
On August 26, 2021, we commenced a tender offer to purchase for cash up to $60,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.50, plus accrued and unpaid interest (“2022 Notes August 2021 Tender Offer”). On September 24, 2021, $50,554 aggregate principal amount of the 2022 Notes, representing 45.52% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes August 2021 Tender Offer resulted in our recognizing a loss of $1,584. As of March 31, 2022, the outstanding aggregate principal amount of the 2022 Notes is $60,501.
2025 Notes
On March 1, 2019, we issued $175,000 aggregate principal amount of senior convertible notes that mature on March 1, 2025 (the “2025 Notes”), unless previously converted or repurchased in accordance with their terms. We granted the underwriters a 13-day over-allotment option to purchase up to an additional $26,250 aggregate principal amount of the 2025 Notes. The underwriters fully exercised the over-allotment option on March 11, 2019 and we issued $26,250 aggregate principal amount of 2025 Notes at settlement on March 13, 2019. The 2025 Notes bear interest at a rate of 6.375% per year, payable semi-annually on March 1 and September 1 each year, beginning September 1, 2019. Total proceeds from the issuance of the 2025 Notes, net of underwriting discounts and offering costs, were $198,674.
On December 28, 2020, we commenced a tender offer to purchase for cash up to $20,000 aggregate principal amount of the 2025 Notes at the purchase price of $111.00, plus accrued and unpaid interest (“2025 Notes December 2020 Tender Offer”). On January 27, 2021, $20,000 aggregate principal amount of the 2025 Notes, representing 9.94% of the previously outstanding 2025 Notes, were validly tendered and accepted. The 2025 Notes December 2020 Tender Offer resulted in our recognizing a loss of $2,676 during the three months ended March 31, 2021. On February 16, 2021, we repurchased an additional $25,082 aggregate principal amount of the 2025 Notes, representing 13.84% of the previously outstanding 2025 Notes, at a price of $107.50, including commissions. As a result of this transaction, we recorded a loss of $2,466, in the amount of the difference between the reacquisition price and the net carrying amount of the 2025 Notes, net of the proportionate amount of unamortized debt issuance costs. As of March 31, 2022, the outstanding aggregate principal amount of the 2025 Notes is $156,168.
Certain key terms related to the convertible features for the 2022 Notes, and the 2025 Notes (collectively, the “Convertible Notes”) are listed below.
2022 Notes
2025 Notes
Initial conversion rate(1)
100.2305
110.7420
Initial conversion price
$
9.98
$
9.03
Conversion rate at March 31, 2022(1)(2)
100.2305
110.7420
Conversion price at March 31, 2022(2)(3)
$
9.98
$
9.03
Last conversion price calculation date
4/11/2021
3/1/2022
Dividend threshold amount (per share)(4)
$
0.083330
$
0.060000
(1)Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
(2)Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
(3)The conversion price will increase only if the current monthly dividends (per share) exceed the dividend threshold amount (per share).
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
(4)The conversion rate is increased if monthly cash dividends paid to common shares exceed the monthly dividend threshold amount, subject to adjustment. Current dividend rates are at or below the minimum dividend threshold amount for further conversion rate adjustments for all bonds.
Interest accrues from the date of the original issuance of the Convertible Notes or from the most recent date to which interest has been paid or duly provided. Upon conversion, the holder will receive a separate cash payment with respect to the notes surrendered for conversion representing accrued and unpaid interest to, but not including, the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes. If a holder converts the Convertible Notes after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive shares of our common stock based on the conversion formula described above, a cash payment representing accrued and unpaid interest through the record date in the normal course and a separate cash payment representing accrued and unpaid interest from the record date to the conversion date.
No holder of Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Convertible Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Convertible Notes through and including the maturity date.
In connection with the issuance of the Convertible Notes, we recorded a discount of $3,369 and debt issuance costs of $9,035 which are being amortized over the terms of the Convertible Notes. As of March 31, 2022, $1,643 of the original issue discount and $1,151 of the debt issuance costs remain to be amortized and is included as a reduction within Convertible Notes on the Consolidated Statement of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $3,550 and $4,870, respectively, of interest costs and amortization of financing costs on the Convertible Notes as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $11,333 and $17,905, respectively, of interest costs and amortization of financing costs on the Covertible Notes as interest expense.
Note 6. Public Notes
2023 Notes
On March 15, 2013, we issued $250,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “Original 2023 Notes”). The Original 2023 Notes bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2013. Total proceeds from the issuance of the Original 2023 Notes, net of underwriting discounts and offering costs, were $243,641. On June 20, 2018, we issued an additional $70,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “Additional 2023 Notes”, and together with the Original 2023 Notes, the “2023 Notes”). The Additional 2023 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2023 Notes and bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the Additional 2023 Notes, net of underwriting discounts, were $69,403.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $105.00, plus accrued and unpaid interest (“2023 Notes November Tender Offer”). On December 15, 2020, $36,644 aggregate principal amount of the 2023 Notes were tendered, of which, $30,000 aggregate principal amount, representing 9.38% of the previously outstanding 2023 Notes, were validly accepted pursuant to the applicable 2023 Notes November Tender Offer (applying a proration factor of approximately 82.27%). The 2023 Notes November Tender Offer resulted in our recognizing a loss of $1,694 during the three months ended December 31, 2020.
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
On March 9, 2021, we commenced a tender offer to purchase for cash any and all of the $290,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.25, plus accrued and unpaid interest (“2023 Notes March 9, 2021 Tender Offer”). On March 15, 2021, $4,219 aggregate principal amount of the 2023 Notes were tendered, representing 1.45% of the previously outstanding 2023 Notes. On March 23, 2021, we commenced a tender offer to purchase for cash any and all of the $285,781 aggregate principal amount of the 2023 Notes at the purchase price of $104.20, plus accrued and unpaid interest (“2023 Notes March 23, 2021 Tender Offer”). On March 29, 2021, $726 aggregate principal amount of the 2023 Notes were tendered, representing 0.25% of the previously outstanding 2023 Notes. The 2023 Notes March 9, 2021 Tender Offer and the 2023 Notes March 23, 2021 Tender Offer resulted in our recognizing a loss of $234 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.15, plus accrued and unpaid interest (“2023 Notes April 2021 Tender Offer”). On May 4, 2021, $836 aggregate principal amount of the 2023 Notes were tendered, representing 0.29% of the previously outstanding 2023 Notes. The 2023 Notes April 2021 Tender Offer resulted in our recognizing a loss of $43 during the three months ended June 30, 2021. As of March 31, 2022, the outstanding aggregate principal amount of the 2023 Notes is $284,219.
2024 Notes
On December 10, 2015, we issued $160,000 aggregate principal amount of unsecured notes that mature on June 15, 2024 (the “2024 Notes”). The 2024 Notes bore interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning March 15, 2016. Total proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were $155,043. On June 16, 2016, we entered into an at-the-market (“ATM”) program with FBR Capital Markets & Co., through which we could sell, by means of ATM offerings, from time to time, up to $100,000 in aggregate principal amount of our existing 2024 Notes (“Initial 2024 Notes ATM”). Following the Initial 2024 Notes ATM, the aggregate principal amount of the 2024 Notes issued was $199,281 for net proceeds of $193,253, after commissions and offering costs. On July 2, 2018, we entered into a second ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of the 2024 Notes (“Second 2024 Notes ATM”). Prior to the February 2021 full redemption discussed below, the 2024 Notes were listed on the New York Stock Exchange (“NYSE”) and traded thereon under the ticker “PBB”.
During the year ended June 30, 2019, we issued an additional $35,162 aggregate principal amount under the Second 2024 Notes ATM, for net proceeds of $34,855, after commissions and offering costs. On March 20, 2020, we commenced a tender offer to purchase for cash any and all of the $234,443 aggregate principal amount of the 2024 Notes (“2024 Notes March Tender Offer”). On March 31, 2020, $655 aggregate principal amount of the 2024 Notes, representing 0.3% of the previously outstanding 2024 Notes, were validly tendered and accepted. The 2024 Notes March Tender Offer resulted in our recognizing a gain of $203 during the three months ended March 31, 2020.
On February 16, 2021, we redeemed $233,788 of the aggregate principal amount of the 2024 Notes. The transaction resulted in our recognizing a loss of $3,391 during the three months ended March 31, 2021. Following the redemption, none of the 2024 Notes remained outstanding.
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
2028 Notes
On June 7, 2018, we issued $55,000 aggregate principal amount of unsecured notes that mature on June 15, 2028 (the “2028 Notes”). The 2028 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the 2028 Notes, net of underwriting discounts and offering costs were $53,119. On July 2, 2018, we entered into an ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2028 Notes (“2028 Notes ATM” or “2028 Notes Follow-on Program”). The 2028 Notes are listed on the NYSE and trade thereon under the ticker “PBY.” During the year ended June 30, 2019, we issued an additional $15,761 aggregate principal amount under the 2028 Notes ATM, for net proceeds of $15,530, after commissions and offering costs.
On June 15, 2021, we redeemed $70,761 of the aggregate principal amount of the 2028 Notes. The transaction resulted in our recognizing a loss of $1,934 during the three months ended June 30, 2021. Following the redemption, none of the 2028 Notes remained outstanding.
6.375% 2024 Notes
On October 1, 2018, we issued $100,000 aggregate principal amount of unsecured notes that mature on January 15, 2024 (the “6.375% 2024 Notes”). The 6.375% 2024 Notes bear interest at a rate of 6.375% per year, payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2019. Total proceeds from the issuance of the 6.375% 2024 Notes, net of underwriting discounts and offering costs, were $98,985.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $10,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.00, plus accrued and unpaid interest (“6.375% 2024 Notes November Tender Offer”). On December 15, 2020, $11,848 aggregate principal amount of the 6.375% 2024 Notes were tendered, of which, $10,000 aggregate principal amount, representing 10% of the previously outstanding 6.375% 2024 Notes, were validly accepted pursuant to the applicable 6.375% 2024 Notes Tender Offer (applying a proration factor of approximately 84.56%). The 6.375% 2024 Notes November Tender Offer resulted in our recognizing a loss of $866 during the three months ended December 31, 2020.
On March 2, 2021, we commenced a tender offer to purchase for cash any and all of the $90,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $109.00, plus accrued and unpaid interest (“6.375% 2024 Notes March 2, 2021 Tender Offer”). On March 8, 2021, $7,738 aggregate principal amount of the 6.375% 2024 Notes, representing 8.60% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. On March 16, 2021, we commenced a tender offer to purchase for cash any and all of the $82,262 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.75, plus accrued and unpaid interest (“6.375% 2024 Notes March 16, 2021 Tender Offer”). On March 22, 2021, $647 aggregate principal amount of the 6.375% 2024 Notes, representing 0.79% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes March 2, 2021 Tender Offer and the 6.375% 2024 Notes March 16, 2021 Tender Offer resulted in our recognizing a loss of $806 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $107.50, plus accrued and unpaid interest (“6.375% 2024 Notes April 2021 Tender Offer”). On May 4, 2021, $226 aggregate principal amount of the 6.375% 2024 notes, representing 0.28% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes April 2021 Tender Offer resulted in our recognizing a loss of $18 during the three months ended June 30, 2021.
On October 8, 2021, we commenced a tender offer to purchase for cash any and all of the $81,389 aggregate principal amount of the 6.375% 2024 Notes at a purchase price of $107.75, plus accrued and unpaid interest (“6.375% 2024 Notes October 2021 Tender Offer”). On October 15, 2021, $149 aggregate principal amount of the 6.375% 2024 Notes, representing 0.18% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes October 2021 Tender Offer resulted in our recognizing a loss of $12. As of March 31, 2022, the outstanding aggregate principal amount of the 6.375% 2024 Notes is $81,240.
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PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
2029 Notes
On December 5, 2018, we issued $50,000 aggregate principal amount of unsecured notes that mature on June 15, 2029 (the “2029 Notes”). The 2029 Notes bear interest at a rate of 6.875% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning March 15, 2019. Total proceeds from the issuance of the 2029 Notes, net of underwriting discounts and offering costs, were $48,057. On February 9, 2019, we entered into an ATM program with B. Riley FBR, Inc., BB&T Capital Markets, and Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2029 Notes (“2029 Notes ATM” or “2029 Notes Follow-on Program”). The 2029 Notes are listed on the NYSE and trade thereon under the ticker “PBC.” During the year ended June 30, 2019, we issued an additional $19,170 aggregate principal amount under the 2029 Notes ATM, for net proceeds of $18,523, after commissions and offering costs. On December 30, 2021, we redeemed $69,170 of the aggregate principal amount of the 2029 Notes. The transaction resulted in our recognizing a loss of $2,044 during the three months ended December 31, 2021. Following the redemption, none of the 2029 Notes remained outstanding.
2026 Notes
On January 22, 2021, we issued $325,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Original 2026 Notes”). The Original 2026 Notes bear interest at a rate of 3.706% per year, payable semi-annually on July 22, and January 22 of each year, beginning on July 22, 2021. Total proceeds from the issuance of the 2026 Notes, net of underwriting discounts and offering costs, were $317,720. On February 19, 2021, we issued an additional $75,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Additional 2026 Notes”, and together with the Original 2026 Notes, the “2026 Notes”). The Additional 2026 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2026 Notes and bear interest at a rate of 3.706% per year, payable semi-annually on July 22 and January 22 of each year, beginning July 22, 2021. Total proceeds from the issuance of the Additional 2026 Notes, net of underwriting discounts and offering costs, were $74,061. As of March 31, 2022, the outstanding aggregate principal amount of the 2026 Notes is $400,000.
3.364% 2026 Notes
On May 27, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on November 15, 2026 (the “3.364% 2026 Notes”). The 3.364% 2026 Notes bear interest at a rate of 3.364% per year, payable semi-annually on November 15, and May 15 of each year, beginning on November 15, 2021. Total proceeds from the issuance of the 3.364% 2026 Notes, net of underwriting discounts and offering costs, were $293,283. As of March 31, 2022, the outstanding aggregate principal amount of the 3.364% 2026 Notes is $300,000.
3.437% 2028 Notes
On September 30, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on October 15, 2028 (the “3.437% 2028 Notes”). The 3.437% 2028 Notes bear interest at a rate of 3.437% per year, payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2022. Total proceeds from the issuance of the 3.437% 2028 Notes, net of underwriting discounts and offering costs, were $291,798. As of March 31, 2022, the outstanding aggregate principal amount of the 3.437% 2028 Notes is $300,000.
The 2023 Notes, the 6.375% 2024 Notes, the 2026 Notes, the 3.364% 2026 Notes, and the 3.437% 2028 Notes (collectively, the “Public Notes”) are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding.
In connection with the issuance of the Public Notes we recorded a discount of $15,802 and debt issuance costs of $17,834, which are being amortized over the term of the notes. As of March 31, 2022, $11,854 of the original issue discount and $11,747 of the debt issuance costs remain to be amortized and are included as a reduction within Public Notes on the Consolidated Statement of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $15,581 and $12,879, respectively, of interest costs and amortization of financing costs on the Public Notes as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $46,336 and $38,441, respectively, of interest costs and amortization of financing costs on the Public Notes as interest expense.
73
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Note 7. Prospect Capital InterNotes®
On February 16, 2012, we entered into a selling agent agreement (the “Original Selling Agent Agreement”) with InspereX LLC (formerly known as “Incapital LLC”), as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®, which was increased to $1,500,000 in May 2014. On May 10, 2019, the Original Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “May 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes®.
On September 16, 2019, the May 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “September 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®. We sold approximately $1,700,000 in aggregate principal amount of Prospect Capital InterNotes® under the Original Selling Agent Agreement, May 2019 Selling Agent Agreement, and September 2019 Selling Agent Agreement (collectively the “Previous Selling Agent Agreements”).
On February 13, 2020, the September 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes® (collectively with the previously authorized selling agent agreements, the “InterNotes® Offerings”). Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement. We have, from time to time, repurchased certain notes issued through the InterNotes® Offerings and, therefore, as of March 31, 2022, $340,774 aggregate principal amount of Prospect Capital InterNotes® were outstanding.
These notes are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.
During the nine months ended March 31, 2022, we issued $155,909 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $152,441. These notes were issued with stated interest rates ranging from 2.25% to 4.63% with a weighted average interest rate of 3.48%. These notes will mature between February 15, 2025 and March 15, 2052. The following table summarizes the Prospect Capital InterNotes® issued during the nine months ended March 31, 2022:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
1,499
2.50%
2.50%
February 15, 2025 – March 15, 2025
5
58,068
2.25% – 4.50%
3.26%
July 15, 2026 – March 15, 2027
7
20,929
2.75% – 4.25%
3.02%
July 15, 2028 – February 15, 2029
10
22,435
3.15% – 4.50%
3.38%
July 15, 2031 – March 15, 2032
12
2,422
3.70%
3.70%
July 15, 2033
15
15,041
3.50% – 4.50%
3.84%
July 15, 2036 – February 15, 2037
30
35,515
4.00% – 4.63%
4.06%
July 15, 2051 – March 15, 2052
$
155,909
During the nine months ended March 31, 2021, we issued $109,562 aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $107,830. These notes were issued with stated interest rates ranging from 1.50% to 6.00% with a weighted average interest rate of 4.70%. These notes mature between Janaury 15, 2024 and April 15, 2031. The following table summarizes the Prospect Capital InterNotes® issued during the nine months ended March 31, 2021:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
662
1.50
%
1.50%
January 15, 2024
5
$
62,567
3.00% – 5.50%
4.60%
July 15, 2025 – April 15, 2026
7
16,921
3.25% – 5.75%
4.84%
July 15, 2027 – April 15, 2028
10
29,412
3.50% – 6.00%
4.90%
July 15, 2030 – April 15, 2031
$
109,562
74
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
During the nine months ended March 31, 2022, we repaid $1,223 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. In order to replace short maturity debt with longer-term debt, we redeemed $322,623 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 5.45%. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the nine months ended March 31, 2022 was $6,403.
The following table summarizes the Prospect Capital InterNotes® outstanding as of March 31, 2022:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
2,161
1.50% – 2.50%
2.19%
January 15, 2024 – March 15, 2025
5
88,361
2.25% – 4.50%
3.17%
January 15, 2026 – March 15, 2027
6
15,107
3.00%
3.00%
June 15, 2027 – July 15, 2027
7
29,252
2.75% – 4.25%
3.17%
January 15, 2028 – February 15, 2029
8
3,511
3.40% – 3.50%
3.45%
June 15, 2029 – July 15, 2029
10
77,185
3.15% – 4.50%
3.85%
August 15, 2029 – March 15, 2032
12
15,066
3.70% – 4.00%
3.95%
June 15, 2033 – July 15, 2033
15
15,041
3.50% – 4.50%
3.84%
July 15, 2036 – February 15, 2037
18
3,085
4.50% – 5.00%
4.73%
January 15, 2031 – April 15, 2031
20
1,597
5.75%
5.75%
November 15, 2032
25
8,036
6.25% – 6.50%
6.37%
November 15, 2038 – May 15, 2039
30
82,372
4.00% – 6.63%
5.29%
November 15, 2042 – March 15, 2052
$
340,774
75
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
During the nine months ended March 31, 2021, we repaid $4,022 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. In order to replace short maturity debt with longer-term debt, we redeemed $112,489 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 5.45%. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the nine months ended March 31, 2021 was $1,100.
The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2021:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
662
1.50%
1.50%
January 15, 2024
5
46,968
3.00% – 4.25%
3.28%
August 15, 2024 – May 15, 2026
6
15,107
3.00%
3.00%
June 15, 2027 – July 15, 2027
7
59,729
3.25% – 5.75%
4.31%
July 15, 2024 – May 15, 2028
8
3,511
3.40% – 3.50%
3.45%
June 15, 2029 – July 15, 2029
10
201,285
3.50% – 6.25%
5.09%
January 15, 2024 – July 15, 2031
12
14,432
4.00% – 6.00%
4.25%
November 15, 2025 – July 15, 2033
15
16,801
5.75% – 6.00%
5.79%
May 15, 2028 – November 15, 2028
18
18,487
4.50% – 6.25%
5.59%
December 15, 2030 – August 15, 2031
20
3,777
5.75% – 6.00%
5.89%
November 15, 2032 – October 15, 2033
25
30,344
6.25% – 6.50%
6.39%
August 15, 2038 – May 15, 2039
30
97,608
5.50% – 6.75%
6.25%
November 15, 2042 – October 15, 2043
$
508,711
In connection with the issuance of Prospect Capital InterNotes®, we incurred $25,485 of fees which are being amortized over the term of the notes, of which $7,196 remains to be amortized and is included as a reduction within Prospect Capital InterNotes® on the Consolidated Statement of Assets and Liabilities as of March 31, 2022.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $3,652 and $10,515, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $13,130 and $30,431, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense.
Note 8. Fair Value and Maturity of Debt Outstanding
As of March 31, 2022, our asset coverage ratio stood at 282.6% based on our outstanding senior securities representing indebtedness of $2,622,342 and our asset coverage ratio on our senior securities that are stock was 230.0%. As of June 30, 2021, our asset coverage ratio stood at 274.0% based on our outstanding senior securities representing indebtedness of $2,267,649 and our asset coverage ratio on our senior securities that are stock was 258.4%. Refer to Note 9, Equity Offerings, Offering Expenses and Distributions for additional discussion on our senior securities that are stock.
Information about our senior securities is shown in the following table as of the end of each of the last ten fiscal years and as of March 31, 2022. (All figures in this item are in thousands except per unit data)
Total Amount Outstanding(1)
Asset Coverage per Unit(2)
Involuntary Liquidating Preference per Unit(3)
Average Market Value per Unit(4)
Credit Facility
Fiscal 2022 (as of March 31, 2022)
$
699,440
$
10,594
—
—
Fiscal 2021 (as of June 30, 2021)
356,937
17,408
—
—
Fiscal 2020 (as of June 30, 2020)
237,536
22,000
—
—
Fiscal 2019 (as of June 30, 2019)
167,000
34,298
—
—
Fiscal 2018 (as of June 30, 2018)
37,000
155,503
—
—
76
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Fiscal 2017 (as of June 30, 2017)
—
—
—
—
Fiscal 2016 (as of June 30, 2016)
—
—
—
—
Fiscal 2015 (as of June 30, 2015)
368,700
18,136
—
—
Fiscal 2014 (as of June 30, 2014)
92,000
69,470
—
—
Fiscal 2013 (as of June 30, 2013)
124,000
34,996
—
—
Fiscal 2012 (as of June 30, 2012)
96,000
22,668
—
—
2015 Notes(5)
Fiscal 2015 (as of June 30, 2015)
$
150,000
$
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
150,000
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
150,000
2,578
—
—
Fiscal 2012 (as of June 30, 2012)
150,000
3,277
—
—
2016 Notes(6)
Fiscal 2016 (as of June 30, 2016)
$
167,500
$
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
167,500
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
167,500
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
167,500
2,578
—
—
Fiscal 2012 (as of June 30, 2012)
167,500
3,277
—
—
2017 Notes(7)
Fiscal 2017 (as of June 30, 2017)
$
50,734
$
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
129,500
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
130,000
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
130,000
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
130,000
2,578
—
—
Fiscal 2012 (as of June 30, 2012)
130,000
3,277
—
—
77
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
2018 Notes(8)
Fiscal 2017 (as of June 30, 2017)
$
85,419
$
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
200,000
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
200,000
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
200,000
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
200,000
2,578
—
—
2019 Notes(10)
Fiscal 2018 (as of June 30, 2018)
$
101,647
$
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
200,000
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
200,000
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
200,000
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
200,000
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
200,000
2,578
—
—
5.00% 2019 Notes(11)
Fiscal 2018 (as of June 30, 2018)
$
153,536
$
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
300,000
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
300,000
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
300,000
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
300,000
2,305
—
—
2020 Notes (14)
Fiscal 2019 (as of June 30, 2019)
$
224,114
$
2,365
—
—
Fiscal 2018 (as of June 30, 2018)
392,000
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
392,000
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
392,000
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
392,000
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
400,000
2,305
—
—
6.95% 2022 Notes(9)
Fiscal 2014 (as of June 30, 2014)
$
100,000
$
2,305
—
$
1,038
Fiscal 2013 (as of June 30, 2013)
100,000
2,578
—
1,036
Fiscal 2012 (as of June 30, 2012)
100,000
3,277
—
996
2022 Notes
Fiscal 2022 (as of March 31, 2022)
$
60,501
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
111,055
2,740
—
—
Fiscal 2020 (as of June 30, 2020)
258,240
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
328,500
2,365
—
—
Fiscal 2018 (as of June 30, 2018)
328,500
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
225,000
2,251
—
—
2023 Notes(12)
Fiscal 2022 (as of March 31, 2022)
$
284,219
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
284,219
2,740
—
—
Fiscal 2020 (as of June 30, 2020)
319,145
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
318,863
2,365
—
—
Fiscal 2018 (as of June 30, 2018)
318,675
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
248,507
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
248,293
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
248,094
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
247,881
2,305
—
—
78
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Fiscal 2013 (as of June 30, 2013)
247,725
2,578
—
—
2024 Notes(15)
Fiscal 2020 (as of June 30, 2020)
$
233,788
$
2,408
—
$
959
Fiscal 2019 (as of June 30, 2019)
234,443
2,365
—
1,002
Fiscal 2018 (as of June 30, 2018)
199,281
2,452
—
1,029
Fiscal 2017 (as of June 30, 2017)
199,281
2,251
—
1,027
Fiscal 2016 (as of June 30, 2016)
161,364
2,269
—
951
6.375% 2024 Notes(12)
Fiscal 2022 (as of March 31, 2022)
$
81,240
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
81,389
2,740
—
—
Fiscal 2020 (as of June 30, 2020)
99,780
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
99,726
2,365
—
—
2025 Notes
Fiscal 2022 (as of March 31, 2022)
$
156,168
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
156,168
2,740
—
—
Fiscal 2020 (as of June 30, 2020)
201,250
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
201,250
2,365
—
—
2026 Notes
Fiscal 2022 (as of March 31, 2022)
$
400,000
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
400,000
2,740
—
—
3.364% 2026 Notes
Fiscal 2022 (as of March 31, 2022)
$
300,000
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
300,000
2,740
—
—
3.437% 2028 Notes
Fiscal 2022 (as of March 31, 2022)
$
300,000
$
2,826
—
—
2028 Notes(16)
Fiscal 2020 (as of June 30, 2020)
$
70,761
$
2,408
—
$
950
Fiscal 2019 (as of June 30, 2019)
70,761
2,365
—
984
Fiscal 2018 (as of June 30, 2018)
55,000
2,452
—
1,004
2029 Notes(17)
Fiscal 2021 (as of June 30, 2021)
69,170
2,740
—
1,028
Fiscal 2020 (as of June 30, 2020)
69,170
2,408
—
970
Fiscal 2019 (as of June 30, 2019)
69,170
2,365
—
983
Prospect Capital InterNotes®
Fiscal 2022 (as of March 31, 2022)
$
340,774
$
2,826
—
—
Fiscal 2021 (as of June 30, 2021)
508,711
2,740
—
—
Fiscal 2020 (as of June 30, 2020)
680,229
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
707,699
2,365
—
—
Fiscal 2018 (as of June 30, 2018)
760,924
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
980,494
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
908,808
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
827,442
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
785,670
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
363,777
2,578
—
—
Fiscal 2012 (as of June 30, 2012)
20,638
3,277
—
—
79
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Preferred Stock
Fiscal 2022 (as of March 31, 2022)
$
599,035
$
2,300
—
—
Fiscal 2021 (as of June 30, 2021)
137,040
2,584
—
—
All Senior Securities(12)(13)
Fiscal 2022 (as of March 31, 2022)
$
3,221,377
$
2,300
—
—
Fiscal 2021 (as of June 30, 2021)
2,404,689
2,584
—
—
Fiscal 2020 (as of June 30, 2020)
2,169,899
2,408
—
—
Fiscal 2019 (as of June 30, 2019)
2,421,526
2,365
—
—
Fiscal 2018 (as of June 30, 2018)
2,346,563
2,452
—
—
Fiscal 2017 (as of June 30, 2017)
2,681,435
2,251
—
—
Fiscal 2016 (as of June 30, 2016)
2,707,465
2,269
—
—
Fiscal 2015 (as of June 30, 2015)
2,983,736
2,241
—
—
Fiscal 2014 (as of June 30, 2014)
2,773,051
2,305
—
—
Fiscal 2013 (as of June 30, 2013)
1,683,002
2,578
—
—
Fiscal 2012 (as of June 30, 2012)
664,138
3,277
—
—
(1) Except as noted, the total amount of each class of senior securities outstanding at the end of the year/period presented (in 000’s).
(2)The asset coverage ratio for a class of secured senior securities representing indebtedness is calculated as our consolidated total assets, less all liabilities and indebtedness not represented by senior securities, divided by secured senior securities representing indebtedness. The asset coverage ratio for a class of unsecured senior securities is inclusive of all senior securities. This asset coverage ratio is multiplied by $1,000 to determine the Asset Coverage Per Unit.
(3)This column is inapplicable.
(4)This column is inapplicable, except for the 6.95% 2022 Notes, the 2024 Notes, the 2028 Notes and the 2029 Notes. The average market value per unit is calculated as an average of quarter-end prices and shown as the market value per $1,000 of indebtedness.
(5)We repaid the outstanding principal amount of the 2015 Notes on December 15, 2015.
(6)We repaid the outstanding principal amount of the 2016 Notes on August 15, 2016.
(7)We repaid the outstanding principal amount of the 2017 Notes on October 15, 2017.
(8)We repaid the outstanding principal amount of the 2018 Notes on March 15, 2018.
(9)We redeemed the 6.95% 2022 Notes on May 15, 2015.
(10)We repaid the outstanding principal amount of the 2019 Notes on January 15, 2019.
(11)We redeemed the 5.00% 2019 Notes on September 26, 2018.
(12)For the fiscal years ended June 30, 2020 or prior, the 2023 Notes and 6.375% 2024 Notes are presented net of unamortized discount.
(13)While we do not consider commitments to fund under revolving arrangements to be Senior Securities, if we were to elect to treat such unfunded commitments, which were $43,351 as of March 31, 2022 as Senior Securities for purposes of Section 18 of the 1940 Act, our asset coverage per unit would be $2,270.
(14)We repaid the outstanding principal amount of the 2020 Notes on April 15, 2020.
(15)We redeemed the 2024 Notes on February 16, 2021.
(16)We redeemed the 2028 Notes on June 15, 2021.
(17)We redeemed the 2029 Notes on December 30, 2021.
80
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following table shows our outstanding debt as of March 31, 2022:
Principal Outstanding
Unamortized Discount & Debt Issuance Costs
Net Carrying Value
Fair Value(1)
Effective Interest Rate
Revolving Credit Facility(2)
$
699,440
$
11,504
$
699,440
(3)
$
699,440
1ML+2.05%
(6)
2022 Notes
60,501
121
60,380
60,751
(4)
5.63%
(7)
2025 Notes
156,168
2,673
153,495
167,009
(4)
6.63%
(7)
Convertible Notes
216,669
213,875
227,760
2023 Notes
284,219
804
283,415
290,847
(4)
6.07%
(7)
6.375% 2024 Notes
81,240
339
80,901
83,502
(4)
6.57%
(7)
2026 Notes
400,000
7,600
392,400
378,172
(4)
3.98%
(7)
3.364% 2026 Notes
300,000
6,342
293,658
275,646
(4)
3.60%
(7)
3.437% 2028 Notes
300,000
8,516
291,484
258,249
(4)
3.64%
(7)
Public Notes
1,365,459
1,341,858
1,286,416
Prospect Capital InterNotes®
340,774
7,196
333,578
361,624
(5)
5.73%
(8)
Total
$
2,622,342
$
2,588,751
$
2,575,240
(1)As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of March 31, 2022.
(2)The maximum draw amount of the Revolving Credit facility as of March 31, 2022 is $1,500,000.
(3)Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Note 2 for accounting policy details.
(4)We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5)The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread based on observable market inputs.
(6)Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7)The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs.
(8)For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are amortized on a straight-line method over the stated life of the obligation which approximates level yield, are weighted against the average year-to-date principal balance.
81
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following table shows our outstanding debt as of June 30, 2021:
Principal Outstanding
Unamortized Discount & Debt Issuance Costs
Net Carrying Value
Fair Value (1)
Effective Interest Rate
Revolving Credit Facility(2)
$
356,937
$
11,141
$
356,937
(3)
$
356,937
1ML+2.05%
(6)
2022 Notes
111,055
825
110,230
113,799
(4)
5.69
%
(7)
2025 Notes
156,168
3,298
152,870
171,590
(4)
6.63
%
(7)
Convertible Notes
267,223
263,100
285,389
2023 Notes
284,219
1,397
282,822
302,616
(4)
6.07
%
(7)
6.375% 2024 Notes
81,389
467
80,922
88,996
(4)
6.57
%
(7)
2026 Notes
400,000
8,768
391,232
413,032
(4)
3.94
%
(7)
3.364% 2026 Notes
300,000
7,279
292,721
300,693
(4)
3.57
%
(7)
2029 Notes
69,170
2,150
67,020
71,336
(4)
7.38
%
(7)
Public Notes
1,134,778
1,114,717
1,176,673
Prospect Capital InterNotes®
508,711
10,496
498,215
591,013
(5)
6.17
%
(8)
Total
$
2,267,649
$
2,232,969
$
2,410,012
(1)As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of June 30, 2021.
(2)The maximum draw amount of the Revolving Credit facility as of June 30, 2021 is $1,107,500.
(3)Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Note 2 for accounting policy details.
(4)We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5)The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread based on observable market inputs.
(6)Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7)The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs. For the 2029 Notes, the rate presented is a combined effective interest rate of their respective original Note issuances and Note Follow-on Programs.
(8)For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are amortized on a straight-line method over the stated life of the obligation which approximates level yield, are weighted against the average year-to-date principal balance.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of March 31, 2022:
Payments Due by Period
Total
Less than 1 Year
1 – 3 Years
3 – 5 Years
After 5 Years
Revolving Credit Facility
$
699,440
$
—
$
—
$
699,440
$
—
Convertible Notes
216,669
60,501
156,168
—
—
Public Notes
1,365,459
284,219
81,240
700,000
300,000
Prospect Capital InterNotes®
340,774
—
2,161
88,361
250,252
Total Contractual Obligations
$
2,622,342
$
344,720
$
239,569
$
1,487,801
$
550,252
82
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of June 30, 2021:
Payments Due by Period
Total
Less than 1 Year
1 – 3 Years
3 – 5 Years
After 5 Years
Revolving Credit Facility
$
356,937
$
—
$
—
$
356,937
$
—
Convertible Notes
267,223
—
111,055
156,168
—
Public Notes
1,134,778
—
365,608
400,000
369,170
Prospect Capital InterNotes®
508,711
—
11,744
51,822
445,145
Total Contractual Obligations
$
2,267,649
$
—
$
488,407
$
964,927
$
814,315
We may from time to time seek to cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. The amounts involved may be material. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including secured debt, unsecured debt and/or debt securities convertible into common stock. Any such purchases or exchanges of outstanding debt would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.
Note 9. Equity Offerings, Offering Expenses, and Distributions
On February 13, 2020, we filed a registration statement on Form N-2 (File No. 333-236415) that was effective upon filing pursuant to Rule 462(e) under the Securities Act as permitted under the Small Business Credit Availability Act. The registration statement permits us to issue, through one or more transactions, an indeterminate amount of securities, consisting of common stock, preferred stock, debt securities, subscription rights to purchase our securities, warrants representing rights to purchase our securities or separately tradeable units combining two or more of our securities.
Preferred Stock
On August 3, 2020, we entered into a Dealer Manager Agreement with Preferred Capital Securities, LLC (“PCS”), pursuant to which PCS has agreed to serve as the Company’s agent, principal distributor and dealer manager for the Company’s offering of up to 40,000,000 shares, par value $0.001 per share, of preferred stock, with a liquidation preference of $25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series A1 Preferred Stock (“Series A1 Preferred Stock”), the 5.50% Series M1 Preferred Stock (“Series M1 Preferred Stock”), and the 5.50% Series M2 Preferred Stock (“Series M2 Preferred Stock”). In connection with such offering, on August 3, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland (“SDAT”), reclassifying and designating 120,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as “Convertible Preferred Stock.” On October 30, 2020, and amended on February 18, 2022, we entered into a Dealer Manager Agreement with InspereX LLC, pursuant to which InspereX LLC has agreed to serve as the Company’s agent and dealer manager for the Company’s offering of up to 10,000,000 shares, par value $0.001 per share, of preferred stock, with a liquidation preference of $25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series AA1 Preferred Stock (the “Series AA1 Preferred Stock”) and the 5.50% Series MM1 Preferred Stock (the “Series MM1 Preferred Stock” and together with the Series M1 Preferred Stock and the Series M2 Preferred Stock, the “Series M Preferred Stock”). In connection with such offering, on October 30, 2020 and February 17, 2022, we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 40,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock. On May 19, 2021, we entered into an Underwriting Agreement with UBS Securities LLC, relating to the offer and sale of 187,000 shares, par value $0.001 per share, of 5.50% Series A2 Preferred Stock, with a liquidation preference of $25.00 per share (the “Series A2 Preferred Stock”, and together with the Series A1 Preferred Stock, Series M1 Preferred Stock, Series M2 Preferred Stock, Series AA1 Preferred Stock, and Series MM1 Preferred Stock, the “5.50% Preferred Stock”). The issuance of the Series A2 Preferred Stock settled on May 26, 2021. In connection with such offering, on May 19, 2021, we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 1,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock.
In connection with the offerings of the 5.50% Preferred Stock, we adopted and amended, respectively, a preferred stock dividend reinvestment plan (the “Preferred Stock Plan” or the “Preferred Stock DRIP”), pursuant to which holders of the 5.50% Preferred Stock will have dividends on their 5.50% Preferred Stock automatically reinvested in additional shares of such 5.50% Preferred Stock at a price per share of $25.00, if they elect.
83
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Each series of 5.50% Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities.
At any time prior to the listing of the 5.50% Preferred Stock on a national securities exchange, shares of the 5.50% Preferred Stock are convertible, at the option of the holder of the 5.50% Preferred Stock (the “Holder Optional Conversion”). We will settle any Holder Optional Conversion by paying or delivering, as the case may be, (A) any portion of the Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the Settlement Amount, minus (b) any portion of the Settlement Amount that we elect to pay in cash, divided by (2) the arithmetic average of the daily volume weighted average price of shares of our common stock over each of the five consecutive trading days ending on the Holder Conversion Exercise Date (such arithmetic average, the “5-day VWAP”). For the Series A1 Preferred Stock, the Series AA1 Preferred Stock, and the Series A2 Preferred Stock, “Settlement Amount” means (A) $25.00 per share (the “Stated Value”), plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable 5.50% Holder Optional Conversion Fee for the respective Holder Conversion Deadline. For the Series M Preferred Stock, “Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable Series M Clawback, if any. “Series M Clawback”, if applicable, means an amount equal to the aggregate amount of all dividends, whether paid or accrued, on such share of Series M Stock in the three full months prior to the Holder Conversion Exercise Date. Subject to certain limited exceptions, we will not pay any portion of the Settlement Amount in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction. The right of holders to convert a share of 5.50% Preferred Stock will terminate upon the listing of such share on a national securities exchange.
Subject to certain limited exceptions allowing earlier redemption, beginning on the earlier of the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued, or, for listed shares of 5.50% Preferred Stock, five years from the earliest date on which any series that has been listed was first issued (the earlier of such dates, the “Redemption Eligibility Date”), such share of 5.50% Preferred Stock may be redeemed at any time or from time to time at our option (the “Issuer Optional Redemption”), at a redemption price of 100% of the Stated Value of the shares of 5.50% Preferred Stock to be redeemed plus unpaid dividends accrued to, but not including, the date fixed for redemption.
Subject to certain limitations, each share of 5.50% Preferred Stock may be converted at our option (the “Issuer Optional Conversion”). We will settle any Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the 5-day VWAP, subject to our ability to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value if the 5-day VWAP represents a discount to our net asset value per share of common stock. For the 5.50% Preferred Stock, “IOC Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the date fixed for conversion. In connection with an Issuer Optional Conversion, we will use commercially reasonable efforts to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value and the 5-day VWAP is at a discount to our net asset value per share of common stock, we will settle any conversions in connection with an Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the NAV per share of common stock at the close of business on the business day immediately preceding the date of conversion. We will not pay any portion of the IOC Settlement Amount from an Issuer Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the Redemption Eligibility Date. Beginning on the Redemption Eligibility Date, we may elect to settle any Issuer Optional Conversion in cash without limitation or restriction. In the event that we exercise an Issuer Optional Conversion with respect to any shares of 5.50% Preferred Stock, the holder of such 5.50% Preferred Stock may instead elect a Holder Optional Conversion with respect to such 5.50% Preferred Stock provided that the date of conversion for such Holder Optional Conversion would occur prior to the date of conversion for an Issuer Optional Conversion.
On July 12, 2021, we entered into an underwriting agreement by and among us, Prospect Capital Management L.P., Prospect Administration LLC, and Morgan Stanley & Co. LLC, RBC Capital Markets, LLC and UBS Securities LLC, as representatives of the underwriters, relating to the offer and sale of 6,000,000 shares, or $150,000 in aggregate liquidation preference, of our
84
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
5.35% Series A Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock” or “5.35% Preferred Stock”), at a public offering price of $25.00 per share. Pursuant to the Underwriting Agreement, we also granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of Series A Preferred Stock solely to cover over-allotments. The offer settled on July 19, 2021, and no additional shares of Series A Preferred Stock were issued pursuant to the option. In connection with such offering, on July 15, 2021, we filed Articles Supplementary with SDAT, reclassifying and designating 6,900,000 shares of the Company’s authorized and unissued shares of Common Stock into shares of Series A Preferred Stock.
The Series A Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities.
Subject to certain limited exceptions allowing earlier redemption, at any time after the close of business on July 19, 2026 (any such date, an “Optional Redemption Date”), at our sole option, we may redeem the Series A Preferred Stock in whole or, from time to time, in part, out of funds legally available for such redemption, at a price per share equal to the liquidation preference of $25.00 per share, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for redemption. We may also redeem the Series A Preferred Stock at any time, in whole or, from time to time, in part, including prior to the Optional Redemption Date, pro rata, based on liquidation preference, with all other series of our then outstanding preferred stock, in the event that our Board determines to redeem any series of our preferred stock, in whole or, from time to time, in part, because such redemption is deemed necessary by the Board to comply with the asset coverage requirements of the 1940 Act or for us to maintain RIC status.
In the event of a Change of Control Triggering Event (as defined below), we may, at our option, exercise our special optional redemption right to redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control Triggering Event has occurred by paying the liquidation preference, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for such redemption. To the extent that we exercise our optional redemption right or our special optional redemption right relating to the Series A Preferred Stock, the holders of Series A Preferred Stock will not be permitted to exercise the conversion right described below in respect of their shares called for redemption.
Except to the extent that we have elected to exercise our optional redemption right or our special optional redemption right by providing notice of redemption prior to the Change of Control Conversion Date (as defined below), upon the occurrence of a Change of Control Triggering Event, each holder of Series A Preferred Stock will have the right to convert some or all of the Series A Preferred Stock held by such holder on the Change of Control Conversion Date into a number of our shares of common stock per Series A Preferred Stock to be converted equal to the lesser of:
•the quotient obtained by dividing (i) the sum of the Liquidation Preference per share plus an amount equal to all unpaid dividends thereon (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a Record Date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividends will be included in this sum) by (ii) the Common Stock Price (as defined below); and
•6.03865, subject to certain adjustments,
subject, in each case, to provisions for the receipt of alternative consideration upon conversion as described in the applicable prospectus supplement.
If we have provided or provide a redemption notice with respect to some or all of the Series A Preferred Stock, holders of any Series A Preferred Stock that we have called for redemption will not be permitted to exercise their Change of Control Conversion Right in respect of any of their Series A Preferred Stock that have been called for redemption, and any Series A Preferred Stock subsequently called for redemption that have been tendered for conversion will be redeemed on the applicable date of redemption instead of converted on the Change of Control Conversion Date.
For purposes of the foregoing discussion of a redemption upon the occurrence of a Change of Control Triggering Event, the following definitions are applicable:
85
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
“Change of Control Triggering Event” means the occurrence of any of the following:
•the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation and other than an Excluded Transaction) in one or a series of related transactions, of all or substantially all of the assets of the Company and its Controlled Subsidiaries taken as a whole to any “person” or “group” (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than to any Permitted Holders); provided that, for the avoidance of doubt, a pledge of assets pursuant to any of our secured debt instruments or the secured debt instruments of our Controlled Subsidiaries shall not be deemed to be any such sale, lease, transfer, conveyance or disposition; or
•the consummation of any transaction (including, without limitation, any merger or consolidation and other than an Excluded Transaction) the result of which is that any “person” or “group” (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than any Permitted Holders) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock, measured by voting power rather than number of shares.
Notwithstanding the foregoing, the consummation of any of the transactions referred to in the bullet points above will not be deemed a Change of Control Triggering Event if we or the acquiring or surviving consolidated entity has or continues to have a class of common securities (or ADRs representing such securities) listed on the NYSE, the NYSE American or NASDAQ, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American or NASDAQ, or is otherwise listed or quoted on a national securities exchange.
The “Change of Control Conversion Date” is the date the shares of Series A Preferred Stock are to be converted, which will be a business day selected by us that is no fewer than 20 days nor more than 35 days after the date on which we provide the notice described above to the holders of Series A Preferred Stock.
The “Common Stock Price” will be (i) if the consideration to be received in the Change of Control Triggering Event by the holders of our common stock is solely cash, the amount of cash consideration per share of our common stock or (ii) if the consideration to be received in the Change of Control Triggering Event by holders of our common stock is other than solely cash (x) the average of the closing sale prices per share of our common stock (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event as reported on the principal U.S. securities exchange on which our common stock is then traded, or (y) the average of the last quoted bid prices for our common stock in the over-the-counter market as reported by OTC Markets Group Inc. or similar organization for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event, if our common stock is not then listed for trading on a U.S. securities exchange.
“Controlled Subsidiary” means any of our subsidiaries, 50% or more of the outstanding equity interests of which are owned by us and our direct or indirect subsidiaries and of which we possess, directly or indirectly, the power to direct or cause the direction of the management or policies, whether through the ownership of voting equity interests, by agreement or otherwise.
“Excluded Transaction” means (i) any transaction that does not result in any reclassification, conversion, exchange or cancellation of all or substantially all of the outstanding shares of our Voting Stock; (ii) any changes resulting from a subdivision or combination or a change solely in par value; (iii) any transaction where the shares of our Voting Stock outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving “person” (as that term is used in Section 13(d)(3) of the Exchange Act) or any direct or indirect parent company of the surviving “person” (as that term is used in Section 13(d)(3) of the Exchange Act) immediately after giving effect to such transaction; (iv) any transaction if (A) we become a direct or indirect wholly-owned subsidiary of a holding company and (B)(1) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (2) immediately following that transaction no “person” (as that term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company; or (v) any transaction primarily for the purpose of changing our jurisdiction of incorporation or form of organization.
“Permitted Holders” means (i) us, (ii) one or more of our Controlled Subsidiaries and (iii) Prospect Capital Management or any affiliate of Prospect Capital Management that is organized under the laws of a jurisdiction located in the United States of America and in the business of managing or advising clients.
“Voting Stock” as applied to stock of any person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such person having ordinary voting power for the election of the directors (or the equivalent)
86
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
of such person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.
Except as provided above in connection with a Change of Control Triggering Event, the Series A Preferred Stock is not convertible into or exchangeable for any other securities or property.
For so long as the Series A Preferred Stock is outstanding, we will not exercise any option we have to convert any other series of our outstanding preferred stock to common stock, including the Issuer Optional Conversion, or any other security ranking junior to such preferred stock. As a result, and in accordance with ASC 480, we have presented both our 5.50% Preferred Stock and Series A Preferred Stock within temporary equity on our Consolidated Statement of Assets and Liabilities as of March 31, 2022.
During the nine months ended March 31, 2022, we issued 11,230,210 shares of our Series A1 Preferred Stock for net proceeds of $253,786, 1,251,361 shares of our Series M1 Preferred Stock for net proceeds of $30,372, and 6,000,000 shares of our Series A Preferred Stock for net proceeds of $145,275, each excluding offering costs and preferred stock dividend reinvestments.
Shares of the 5.50% Preferred Stock will pay a monthly dividend, when and if declared by the Board, at a fixed annual rate of 5.50% per annum of the Stated Value of $25.00 per share (computed on the basis of a 360-day year consisting of twelve 30-day months), payable in cash or through the issuance of additional 5.50% Preferred Stock through the 5.50% Preferred Stock DRIP.
Shares of the Series A Preferred Stock will pay a quarterly dividend, when and if declared by the Board, at a fixed annual rate of 5.35% per annum of the Stated Value of $25.00 per share (computed on the basis of a 360-day year consisting of twelve 30-day months), payable in cash
During the nine months ended March 31, 2022 and March 31, 2021, we distributed approximately $11,078 and $446, respectively, to our 5.50% Preferred Stock holders. During the nine months ended March 31, 2022, we distributed approximately $4,302 to our 5.35% Series A Preferred Stock holders. Our distributions to our 5.50% Preferred Stock holders and 5.35% Series A Preferred Stock holders for the nine months ended March 31, 2022 and March 31, 2021, are summarized in the following table:
87
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Declaration Date
Record Date
Payment Date
Amount ($ per share), before pro ration for partial periods
Amount Distributed
5.50% Preferred Stock holders
11/6/2020
11/18/2020
12/1/2020
$
0.114583
$
13
12/4/2020
12/21/2020
1/4/2021
0.114583
33
12/4/2020
1/20/2021
2/1/2021
0.114583
75
12/4/2020
2/17/2021
3/1/2021
0.114583
97
2/9/2021
3/17/2021
4/1/2021
0.114583
228
Distributions for the nine months ended March 31, 2021
$
446
5/7/2021
7/21/2021
8/2/2021
$
0.114583
$
680
5/7/2021
8/18/2021
9/1/2021
0.114583
786
8/24/2021
9/15/2021
10/1/2021
0.114583
941
8/24/2021
10/20/2021
11/1/2021
0.114583
1,054
8/24/2021
11/17/2021
12/1/2021
0.114583
1,197
11/5/2021
12/15/2021
1/3/2022
0.114583
1,296
11/5/2021
1/19/2022
2/1/2022
0.114583
1,498
11/5/2021
2/16/2022
3/1/2022
0.114583
1,688
2/7/2022
3/23/2022
4/1/2022
0.114583
1,938
Distributions for the nine months ended March 31, 2022
$
11,078
5.35% Series A Preferred Stock holders
8/24/2021
10/20/2021
11/1/2021
$
0.382674
$
2,296
11/5/2021
1/19/2022
2/1/2022
0.334375
2,006
Distributions for the nine months ended March 31, 2022
$
4,302
The above table includes dividends paid during the nine months ended March 31, 2022. It does not include distributions previously declared to the 5.50% Preferred Stock holders and 5.35% Series A Preferred Stock holders of record for any future dates, as those amounts are not yet determinable. The following dividends were previously declared and will be recorded and paid subsequent to March 31, 2022:
•$0.114583 per share (before pro ration for partial period holders of record) for 5.50% Preferred Stock holders of record on April 20, 2022 with a payment date of May 2, 2022
•$0.114583 per share (before pro ration for partial period holders of record) for 5.50% Preferred Stock holders of record on May 18, 2022 with a payment date of June 1, 2022
•$0.334375 per share (before pro ration for partial period holders of record) for 5.35% Series A Preferred Stock holders of record on April 20, 2022 with a payment date of May 2, 2022
As of March 31, 2022, we have accrued approximately $30 and $1,338 in dividends that have not yet been declared for our 5.50% Preferred Stock holders and 5.35% Series A Preferred Stock holders, respectively.
During the nine months ended March 31, 2022, we issued 8,428 shares of our Series A1 Preferred Stock and 176 shares of our Series M1 Preferred Stock, in connection with the Preferred Stock Dividend Reinvestment Plan.
During the nine months ended March 31, 2022, 10,350 shares of our Series A1 Preferred Stock were converted to 29,749 shares of our common stock, in connection with Holder Optional Conversions.
The conversion rights discussed above are accounted for as share settled redemption features and are determined to be clearly and closely related to the preferred stock host instruments. As such, we determined that no bifurcation was necessary.
88
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following table shows our outstanding Preferred Stock as of March 31, 2022.
Series
Shares Outstanding
Liquidation Value
Series A1
16,394,214
$
409,855
Series M1
1,380,203
34,505
Series A2
187,000
4,675
Series A
6,000,000
150,000
Total
23,961,417
$
599,035
The following table shows our outstanding Preferred Stock as of June 30, 2021.
Series
Shares Outstanding
Liquidation Value
Series A1
5,163,926
$
129,098
Series M1
130,666
3,267
Series A2
187,000
4,675
Total
5,481,592
$
137,040
Preferred Stock issued prior to the issuance of our 5.35% Series A Preferred Stock has a carrying value equal to liquidation value per share on our Consolidated Statements of Assets and Liabilities. Subsequent issuances of our Preferred Stock classified as temporary equity are recorded net of issuance costs. The carrying value is inclusive of cumulative accrued and unpaid dividends as of March 31, 2022.
Common Stock
Our common stockholders’ equity accounts as of March 31, 2022 and June 30, 2021 reflect cumulative shares issued as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters, our common stock dividend reinvestment plan in connection with the acquisition of certain controlled portfolio companies and in connection with our 5.50% Preferred Stock Holder Optional Conversion. When our common stock is issued, the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
On August 24, 2011, our Board of Directors approved a share repurchase plan (the “Repurchase Program”) under which we may repurchase up to $100,000 of our common stock at prices below our net asset value per share. Prior to any repurchase, we are required to notify stockholders of our intention to purchase our common stock.
We did not repurchase any shares of our common stock under the Repurchase Program for the nine months ended March 31, 2022 and March 31, 2021. As of March 31, 2022, the approximate dollar value of shares that may yet be purchased under the Repurchase Program is $65,860.
On June 12, 2020, we entered into equity distribution agreements with each of RBC Capital Markets, LLC, Barclays Capital Inc., and KeyBanc Capital Markets Inc. pursuant to which we may offer and sell, by means of at-the-market offerings, up to 50,000,000 shares of our $0.001 par value Common Stock (“Common Stock ATM”).
Excluding common stock dividend reinvestments and shares issued in connection with the 5.50% Preferred Stock Holder Optional Conversion, during the nine months ended March 31, 2022 and March 31, 2021, we did not issue any shares of our common stock.
On February 9, 2016, we amended our common stock dividend reinvestment plan that provided for reinvestment of our dividends or distributions on behalf of our stockholders, unless a stockholder elects to receive cash, to add the ability of stockholders to purchase additional common shares by making optional cash investments. Under the revised dividend reinvestment and direct common stock repurchase plan, stockholders may elect to purchase additional common shares through our transfer agent in the open market or in negotiated transactions.
89
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
On April 17, 2020, our Board of Directors approved further amendments to our common stock dividend reinvestment plan, effective May 21, 2020, that principally provide for the number of newly-issued shares of our common stock to be credited to a stockholder’s account shall be determined by dividing the total dollar amount of the distribution payable to such common stockholder by 95% of the market price per share of our common stock at the close of regular trading on the Nasdaq Global Select Market on the date fixed by the Board of Directors for such distribution.
On June 11, 2021, at a special meeting of our stockholders, our stockholders authorized us to sell shares of our common stock (during the next 12 months) at a price or prices below our net asset value per share at the time of sale in one or more offerings, subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of its outstanding common stock immediately prior to such sale).
On March 14, 2022, we filed a notice of meeting and the definitive proxy statement in connection with a special meeting of our stockholders that is scheduled to be held on June 10, 2022 for the purpose of asking our stockholders to vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price or prices below our then current net asset value per share in one or more offerings during the next 12 months following such approval, subject to certain conditions.
During the nine months ended March 31, 2022 and March 31, 2021, we distributed approximately $210,722 and $206,288, respectively, to our common stockholders. The following table summarizes our distributions to common stockholders declared and payable for the nine months ended March 31, 2021 and March 31, 2021.
Declaration Date
Record Date
Payment Date
Amount Per Share
Amount Distributed (in thousands)
5/8/2020
7/31/2020
8/20/2020
$
0.06
$
22,515
5/8/2020
8/31/2020
9/17/2020
0.06
22,619
8/25/2020
9/30/2020
10/22/2020
0.06
22,727
8/25/2020
10/30/2020
11/19/2020
0.06
22,836
11/6/2020
11/30/2020
12/24/2020
0.06
22,942
11/6/2020
12/31/2020
1/21/2021
0.06
23,046
11/6/2020
1/29/2021
2/18/2021
0.06
23,140
2/9/2021
2/26/2021
3/18/2021
0.06
23,219
2/9/2021
3/31/2021
4/22/2021
0.06
23,244
Total declared and payable for the nine months ended March 31, 2021
$
206,288
5/7/2021
7/28/2021
8/19/2021
$
0.06
$
23,325
5/7/2021
8/27/2021
9/23/2021
0.06
23,348
8/24/2021
9/28/2021
10/21/2021
0.06
23,370
8/24/2021
10/27/2021
11/18/2021
0.06
23,392
11/5/2021
11/26/2021
12/23/2021
0.06
23,413
11/5/2021
12/29/2021
1/20/2022
0.06
23,435
11/5/2021
1/27/2022
2/17/2022
0.06
23,457
2/7/2022
2/24/2022
3/22/2022
0.06
23,479
2/7/2022
3/29/2022
4/20/2022
0.06
23,503
Total declared and payable for the nine months ended March 31, 2022
$
210,722
Dividends and distributions to common stockholders are recorded on the ex-dividend date. As such, the table above includes distributions with record dates during nine months ended March 31, 2022 and March 31, 2021. It does not include distributions previously declared to common stockholders of record on any future dates, as those amounts are not yet determinable. The following dividends were previously declared and will be recorded and payable subsequent to March 31, 2022:
•$0.06 per share for April 2022 holders of record on April 27, 2022 with a payment date of May 19, 2022
90
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
During the nine months ended March 31, 2022 and March 31, 2021, we issued 3,268,814 and 13,852,073 shares of our common stock, respectively, in connection with the common stock dividend reinvestment plan.
During the nine months ended March 31, 2022, Prospect officers and directors purchased 73,939 shares of our common stock, or 0.02% of total outstanding shares as of March 31, 2022, through shares issued in connection with our common stock dividend reinvestment plan.
As of March 31, 2022, we have reserved 23,358,402 shares of our common stock for issuance upon conversion of the Convertible Notes (see Note 5) and 1,000,000,000 shares of our common stock for issuance upon conversion of the 5.50% Preferred Stock.
Note 10. Other Income
Other income consists of structuring fees, overriding royalty interests, revenue receipts related to net profit interests, deal deposits, administrative agent fees, and other miscellaneous and sundry cash receipts. The following table shows income from such sources during the three and nine months ended March 31, 2022 and March 31, 2021.
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Structuring, advisory, and amendment fees
$
10,149
$
8,875
$
38,963
$
26,293
Royalty and net revenue interests
23,285
9,464
43,579
27,638
Administrative agent fees
202
132
529
381
Total other income
$
33,636
$
18,471
$
83,071
$
54,312
Note 11. Net Increase (Decrease) in Net Assets per Common Share
Earnings per share is calculated in accordance with ASC 260, “Earnings per Share”. Basic earnings per share is calculated by dividing the net increase (decrease) in net assets resulting from operations, less preferred dividends, by the weighted average number of common shares outstanding. Diluted earnings per share gives effect to all dilutive potential common shares outstanding using the if-converted method for Preferred Stock (Refer to Note 9). Diluted earnings per share excludes all dilutive potential common shares if their effect is anti-dilutive. During the nine months ended March 31, 2022 and March 31, 2021, we did not have potential common shares that would be anti-dilutive.
The following information sets forth the computation of basic and diluted earnings per common share for the three and nine months ended March 31, 2022 and March 31, 2021:
For the three months ended March 31, 2022
For the Nine Months Ended March 31, 2022
Basic
Diluted
Basic
Diluted
Net increase in net assets resulting from operations applicable to Common Stockholders
$
157,157
$
164,296
$
613,292
$
630,040
Weighted average common shares outstanding
391,091,485
432,808,120
389,981,608
419,914,712
Earnings per share
$
0.40
$
0.38
$
1.57
$
1.50
For the Three Months Ended March 31, 2021
For the Nine Months Ended March 31, 2021
Basic
Diluted
Basic
Diluted
Net increase in net assets resulting from operations applicable to Common Stockholders
$
246,008
$
246,408
$
719,675
$
720,121
Weighted average common shares outstanding
385,996,921
389,420,855
380,985,329
382,259,257
Earnings per share
$
0.64
$
0.63
$
1.89
$
1.88
91
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Note 12. Income Taxes
While our fiscal year end for financial reporting purposes is June 30 of each year, our tax year end is August 31 of each year. The information presented in this footnote is based on our tax year end for each period presented, unless otherwise specified.
For income tax purposes, dividends paid and distributions made to stockholders are reported as ordinary income, capital gains, non-taxable return of capital, or a combination thereof. The tax character of dividends paid to common stockholders during the tax years ended August 31, 2021, 2020, and 2019 were as follows:
Tax Year Ended August 31,
2021
2020
2019
Ordinary income
$
251,171
$
169,041
$
263,773
Capital gain
—
—
—
Return of capital
25,784
96,720
—
Total dividends paid to common stockholders
$
276,955
(1)
$
265,761
$
263,773
(1)Final determination of tax character will not be final until we file our return for the tax year ended August 31, 2021.
The Company began issuing shares of Preferred Stock and declaring dividends on shares Preferred Stock outstanding during the tax year ended August 31, 2021. The tax character of dividends paid to preferred stockholders during the tax year ended August 31, 2021 were as follows:
Tax Year Ended August 31, 2021
Ordinary income
$
2,391
Capital gain
—
Return of capital
—
Total dividends paid to preferred stockholders
$
2,391
(2)
(2)Final determination of tax character will not be final until we file our return for the tax year ended August 31, 2021.
As of August 25, 2021 when our prior Form 10-K was filed for the year ended June 30, 2021, we estimated our distributions for the fiscal year then ended to be $265,593 of distributions of ordinary income and $12,263 of our distributions to be return of capital. Subsequent to our filing date, we obtained more information from our underlying investments as to the character of the distributions for the tax year ended August 31, 2021, which resulted in changes to distributions previously disclosed in our Form 10-K filing. As a result of the change, our total distributable loss on our Consolidated Statement of Assets and Liabilities for the year ended June 30, 2021 changed from $232,659 to $210,570, with $22,089 being reclassified to distributions from capital. The remaining reclassification of tax distributions classified as return of capital for the tax year ended August 31, 2021 have been adjusted in the fiscal year ended June 30, 2022. This adjustment resulted in an increase to distributable earnings of $3,695 for the three months ended September 30, 2021.
We generate certain types of income that may be exempt from U.S. withholding tax when distributed to non-U.S. stockholders. Under IRC Section 871(k), a RIC is permitted to designate distributions of qualified interest income and short-term capital gains as exempt from U.S. withholding tax when paid to non-U.S. stockholders with proper documentation. For the 2022 calendar year, 48.13% of our taxable dividends as of March 31, 2022 qualified as interest related dividends which are exempt from U.S. withholding tax applicable to non-U.S. stockholders. This percentage is based on the best estimates available at the time of this filing. The final percentage will be determined with the filing of Form 1099-DIV.
We also generate income that may be beneficial to shareholders that face interest expense limitations. Under IRC Section 163(j), a RIC is permitted to designate distributions attributable to net business interest income as section 163(j) interest dividends. For the 2022 calendar year 69.16% of our taxable ordinary dividends as of March 31, 2022 qualified as section 163(j) interest dividends. This percentage is based on the best estimates available at the time of this filing. The final percentage will be determined with the filing of Form 1099-DIV.
For the tax year ending August 31, 2022, the tax character of dividends paid to stockholders through March 31, 2022 is expected to be ordinary income and capital gains however due to the difference between our fiscal and tax year ends, the final
92
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
determination of the tax character of dividends between ordinary income and capital gains will not be made until we file our tax return for the tax year ending August 31, 2022.
Taxable income generally differs from net increase in net assets resulting from operations for financial reporting purposes due to temporary and permanent differences in the recognition of income and expenses, and generally excludes net unrealized gains or losses, as unrealized gains or losses are generally not included in taxable income until they are realized. The following reconciles the net increase in net assets resulting from operations to taxable income for the tax years ended August 31, 2021, 2020, and 2019:
Tax Year Ended August 31,
2021
2020
2019
Net increase (decrease) in net assets resulting from operations
$
428,106
$
(78,949)
$
93,093
Net realized (gains) losses on investments
16,173
10,139
(5,923)
Net unrealized (gains) losses on investments
(143,654)
328,997
217,159
Other temporary book-to-tax differences
(47,170)
(91,368)
(87,511)
Permanent differences
(20)
57
78
Taxable income before deductions for distributions
$
253,435
(3)
$
168,876
$
216,896
(3) Final determination of permanent differences will not be final until we file our return for the tax year ended August 31, 2021.
Capital losses in excess of capital gains earned in a tax year may generally be carried forward and used to offset capital gains, subject to certain limitations. As of August 31, 2021, we had capital loss carryforwards of approximately $129,669 available for use in later tax years. The unused balance each year will be carried forward and utilized as gains are realized, subject to limitations. While our ability to utilize losses in the future depends upon a variety of factors that cannot be known in advance, some of the Company’s capital loss carryforwards may become permanently unavailable due to limitations by the Code.
For the tax year ended August 31, 2021, we had no cumulative taxable income in excess of cumulative distributions.
As of March 31, 2022, the cost basis of investments for tax purposes was $6,902,743 resulting in an estimated net unrealized gain of $527,188. As of March 31, 2022, the gross unrealized gains and losses were $1,595,303 and $1,068,115, respectively. As of June 30, 2021, the cost basis of investments for tax purposes was $6,050,304 resulting in an estimated net unrealized gain of $151,474. As of June 30, 2021, the gross unrealized gains and losses were $1,208,128 and $1,056,654, respectively. Due to the difference between our fiscal year end and tax year end, the cost basis of our investments for tax purposes as of March 31, 2022 and June 30, 2021 was calculated based on the book cost of investments as of March 31, 2022 and June 30, 2021, respectively, with cumulative book-to-tax adjustments for investments through August 31, 2021 and 2020, respectively.
In general, we may make certain adjustments to the classification of net assets as a result of permanent book-to-tax differences, which may include merger-related items, differences in the book and tax basis of certain assets and liabilities, and nondeductible federal excise taxes, among other items. During the tax year ended August 31, 2021, we decreased overdistributed net investment income by $20 and increased capital in excess of par value by $20. During the tax year ended August 31, 2020, we increased overdistributed net investment income by $57 and decreased capital in excess of par value by $57. Due to the difference between our fiscal and tax year end, the reclassifications for the taxable year ended August 31, 2021 are being recorded in the fiscal year ending June 30, 2022 and the reclassifications for the taxable year ended August 31, 2020 were recorded in the fiscal year ended June 30, 2021. The reclassifications, if any, for the taxable year ended August 31, 2021 will be recorded in the fiscal year ending June 30, 2022 once we file our tax return for the tax year ending August 31, 2021.
Note 13. Related Party Agreements and Transactions
Investment Advisory Agreement
We have entered into an investment advisory and management agreement with the Investment Adviser (the “Investment Advisory Agreement”) under which the Investment Adviser, subject to the overall supervision of our Board of Directors, manages the day-to-day operations of, and provides investment advisory services to, us. Under the terms of the Investment Advisory Agreement, the Investment Adviser: (i) determines the composition of our portfolio, the nature and timing of the changes to our portfolio and the manner of implementing such changes, (ii) identifies, evaluates and negotiates the structure of the investments we make (including performing due diligence on our prospective portfolio companies), and (iii) closes and monitors investments we make.
93
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The Investment Adviser’s services under the Investment Advisory Agreement are not exclusive, and it is free to furnish similar services to other entities so long as its services to us are not impaired. For providing these services the Investment Adviser receives a fee from us, consisting of two components: a base management fee and an incentive fee. The base management fee is calculated at an annual rate of 2.00% on our total assets. For services currently rendered under the Investment Advisory Agreement, the base management fee is payable quarterly in arrears. The base management fee is calculated based on the average value of our gross assets at the end of the two most recently completed calendar quarters and appropriately adjusted for any share issuances or repurchases during the current calendar quarter. The total gross base management fee incurred to the favor of the Investment Adviser was $36,426 and $29,183 during the three months ended March 31, 2022 and March 31, 2021, respectively. The total gross base management fee incurred to the favor of the Investment Advisor was $102,472 and $83,866 during the nine months ended March 31, 2022 and March 31, 2021, respectively.
The incentive fee has two parts. The first part, the income incentive fee, is calculated and payable quarterly in arrears based on our pre-incentive fee net investment income less preferred dividends for the immediately preceding calendar quarter. For this purpose, pre-incentive fee net investment income means interest income, dividend income and any other income (including any other fees (other than fees for providing managerial assistance), such as commitment, origination, structuring, diligence and consulting fees and other fees that we receive from portfolio companies) accrued during the calendar quarter, minus our operating expenses for the quarter (including the base management fee, expenses payable under the Administration Agreement described below, and any interest expense and dividends paid on any issued and outstanding preferred stock, but excluding the incentive fee). Pre-incentive fee net investment income includes, in the case of investments with a deferred interest feature (such as original issue discount, debt instruments with payment-in-kind interest and zero coupon securities), accrued income that we have not yet received in cash. Pre-incentive fee net investment income does not include any realized capital gains, realized capital losses or unrealized capital gains or losses. Pre-incentive fee net investment income, expressed as a rate of return on the value of our net assets at the end of the immediately preceding calendar quarter, is compared to a “hurdle rate” of 1.75% per quarter (7.00% annualized).
The net investment income used to calculate this part of the incentive fee is also included in the amount of the gross assets used to calculate the 2.00% base management fee. We pay the Investment Adviser an income incentive fee with respect to our pre-incentive fee net investment income in each calendar quarter as follows:
•No incentive fee in any calendar quarter in which our pre-incentive fee net investment income does not exceed the hurdle rate;
•100.00% of our pre-incentive fee net investment income with respect to that portion of such pre-incentive fee net investment income, if any, that exceeds the hurdle rate but is less than 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate); and
•20.00% of the amount of our pre-incentive fee net investment income, if any, that exceeds 125.00% of the quarterly hurdle rate in any calendar quarter (8.75% annualized assuming a 7.00% annualized hurdle rate).
These calculations are appropriately prorated for any period of less than three months and adjusted for any share issuances or repurchases during the current quarter.
94
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The second part of the incentive fee, the capital gains incentive fee, is determined and payable in arrears as of the end of each calendar year (or upon termination of the Investment Advisory Agreement, as of the termination date), and equals 20.00% of our realized capital gains for the calendar year, if any, computed net of all realized capital losses and unrealized capital depreciation at the end of such year. In determining the capital gains incentive fee payable to the Investment Adviser, we calculate the aggregate realized capital gains, aggregate realized capital losses and aggregate unrealized capital depreciation, as applicable, with respect to each investment that has been in our portfolio. For the purpose of this calculation, an “investment” is defined as the total of all rights and claims which may be asserted against a portfolio company arising from our participation in the debt, equity, and other financial instruments issued by that company. Aggregate realized capital gains, if any, equal the sum of the differences between the aggregate net sales price of each investment and the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate realized capital losses equal the sum of the amounts by which the aggregate net sales price of each investment is less than the aggregate amortized cost basis of such investment when sold or otherwise disposed. Aggregate unrealized capital depreciation equals the sum of the differences, if negative, between the aggregate valuation of each investment and the aggregate amortized cost basis of such investment as of the applicable calendar year-end. At the end of the applicable calendar year, the amount of capital gains that serves as the basis for our calculation of the capital gains incentive fee involves netting aggregate realized capital gains against aggregate realized capital losses on a since-inception basis and then reducing this amount by the aggregate unrealized capital depreciation. If this number is positive, then the capital gains incentive fee payable is equal to 20.00% of such amount, less the aggregate amount of any capital gains incentive fees paid since inception.
The total income incentive fee incurred was $19,967 and $18,251 during the three months ended March 31, 2022 and March 31, 2021, respectively. The fees incurred for the nine months ended March 31, 2022 and March 31, 2021 were $59,296 and $53,354, respectively.No capital gains incentive fee was incurred during the nine months ended March 31, 2022 and March 31, 2021. Income incentive fee for the nine months ended March 31, 2021 includes a $264 adjustment for fees earned in prior periods that were neither expensed nor paid to the Investment Adviser.
Administration Agreement
We have also entered into an administration agreement (the “Administration Agreement”) with Prospect Administration under which Prospect Administration, among other things, provides (or arranges for the provision of) administrative services and facilities for us. For providing these services, we reimburse Prospect Administration for our allocable portion of overhead incurred by Prospect Administration in performing its obligations under the Administration Agreement, including rent and our allocable portion of the costs of our Chief Financial Officer and Chief Compliance Officer and her staff, including the internal legal staff. Under this agreement, Prospect Administration furnishes us with office facilities, equipment and clerical, bookkeeping and record keeping services at such facilities. Prospect Administration also performs, or oversees the performance of, our required administrative services, which include, among other things, being responsible for the financial records that we are required to maintain and preparing reports to our stockholders and reports filed with the SEC. In addition, Prospect Administration assists us in determining and publishing our net asset value, overseeing the preparation and filing of our tax returns and the printing and dissemination of reports to our stockholders, and generally oversees the payment of our expenses and the performance of administrative and professional services rendered to us by others. Under the Administration Agreement, Prospect Administration also provides on our behalf managerial assistance to those portfolio companies to which we are required to provide such assistance (see Managerial Assistance section below). The Administration Agreement may be terminated by either party without penalty upon 60 days’ written notice to the other party. Prospect Administration is a wholly-owned subsidiary of the Investment Adviser.
The Administration Agreement provides that, absent willful misfeasance, bad faith or negligence in the performance of its duties or by reason of the reckless disregard of its duties and obligations, Prospect Administration and its officers, managers, partners, agents, employees, controlling persons, members and any other person or entity affiliated with it are entitled to indemnification from us for any damages, liabilities, costs and expenses (including reasonable attorneys’ fees and amounts reasonably paid in settlement) arising from the rendering of Prospect Administration’s services under the Administration Agreement or otherwise as administrator for us. Our payments to Prospect Administration are reviewed quarterly by our Board of Directors.
The allocation of net overhead expense from Prospect Administration was $4,126 and $2,685 for the three months ended March 31, 2022 and March 31, 2021, respectively.
The allocation of net overhead expense from Prospect Administration was $10,891 and $10,768 for the nine months ended March 31, 2022 and March 31, 2021, respectively.Prospect Administration received estimated payments of $5,391 and $1,038 directly from our portfolio companies, and certain funds managed by the Investment Adviser for legal services during the nine
95
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
months ended March 31, 2022 and March 31, 2021, respectively. In addition, we were given a credit in the amount of $3,522 for legal expenses incurred on behalf of our portfolio companies that were remitted to Prospect Administration during the three months ended March 31, 2021. We were given a credit for these payments as a reduction of the administrative services cost payable by us to Prospect Administration. Had Prospect Administration not received these payments, Prospect Administration’s charges for its administrative services would have increased by this amount.
Managerial Assistance
As a BDC, we are obligated under the 1940 Act to make available to certain of our portfolio companies significant managerial assistance. “Making available significant managerial assistance” refers to any arrangement whereby we provide significant guidance and counsel concerning the management, operations, or business objectives and policies of a portfolio company. We are also deemed to be providing managerial assistance to all portfolio companies that we control, either by ourselves or in conjunction with others. The nature and extent of significant managerial assistance provided by us to controlled and non-controlled portfolio companies will vary according to the particular needs of each portfolio company. Examples of such activities include (i) advice on recruiting, hiring, management and termination of employees, officers and directors, succession planning and other human resource matters; (ii) advice on capital raising, capital budgeting, and capital expenditures; (iii) advice on advertising, marketing, and sales; (iv) advice on fulfillment, operations, and execution; (v) advice on managing relationships with unions and other personnel organizations, financing sources, vendors, customers, lessors, lessees, lawyers, accountants, regulators and other important counterparties; (vi) evaluating acquisition and divestiture opportunities, plant expansions and closings, and market expansions; (vii) participating in audit committee, nominating committee, board and management meetings; (viii) consulting with and advising board members and officers of portfolio companies (on overall strategy and other matters); and (ix) providing other organizational, operational, managerial and financial guidance.
Prospect Administration, when performing a managerial assistance agreement executed with each portfolio company to which we provide managerial assistance, arranges for the provision of such managerial assistance on our behalf. When doing so, Prospect Administration utilizes personnel of our Investment Adviser. We, on behalf of Prospect Administration, invoice portfolio companies receiving and paying for managerial assistance, and we remit to Prospect Administration its cost of providing such services, including the charges deemed appropriate by our Investment Adviser for providing such managerial assistance. No income is recognized by Prospect.
During the three months ended March 31, 2022 and March 31, 2021, we received payments of $2,276 and $1,835, respectively, from our portfolio companies for managerial assistance and subsequently remitted these amounts to Prospect Administration. During the nine months ended March 31, 2022 and March 31, 2021, we received payments of $5,946 and $5,655, respectively, from our portfolio companies for managerial assistance and subsequently remitted these amounts to Prospect Administration.
Co-Investments
On January 13, 2020, we received an exemptive order from the SEC (the “Order”), which superseded a prior co-investment exemptive order granted on February 10, 2014, that gave us the ability to negotiate terms other than price and quantity of co-investment transactions with other funds managed by the Investment Adviser or certain affiliates, including Priority Income Fund, Inc. and Prospect Sustainable Income Fund, Inc. (f/k/a Prospect Flexible Income Fund, Inc.), where co-investing would otherwise be prohibited under the 1940 Act, subject to the conditions included therein.
Under the terms of the Order, a “required majority” (as defined in Section 57(o) of the 1940 Act) of our independent directors must make certain conclusions in connection with a co-investment transaction, including that (1) the terms of the proposed transaction, including the consideration to be paid, are reasonable and fair to us and our stockholders and do not involve overreaching of us or our stockholders on the part of any person concerned and (2) the transaction is consistent with the interests of our stockholders and is consistent with our investment objective and strategies. In certain situations where a co-investment with one or more funds managed or owned by the Investment Adviser or its affiliates is not covered by the Order, such as when there is an opportunity to invest in different securities of the same issuer, the personnel of the Investment Adviser or its affiliates will need to decide which fund will proceed with the investment. Such personnel will make these determinations based on policies and procedures, which are designed to reasonably ensure that investment opportunities are allocated fairly and equitably among affiliated funds over time and in a manner that is consistent with applicable laws, rules and regulations. Moreover, except in certain circumstances, when relying on the Order, we will be unable to invest in any issuer in which one or more funds managed by the Investment Adviser or its affiliates has previously invested.
We reimburse CLO investment valuation services fees initially incurred by Priority Income Fund, Inc. During the three months ended March 31, 2022 and March 31, 2021, we recognized expenses that were reimbursed for valuation services of $28 and
96
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
$32, respectively. During the nine months ended March 31, 2022 and March 31, 2021, we recognized expenses that were reimbursed for valuation services of $88 and $95, respectively.Conversely, Priority Income Fund, Inc. and Prospect Sustainable Income Fund, Inc. (f/k/a Prospect Flexible Income Fund, Inc.) reimburse us for software fees, expenses which were initially incurred by Prospect.
Note 14. Transactions with Controlled Companies
The descriptions below detail the transactions which Prospect Capital Corporation (“Prospect”) has entered into with each of our controlled companies. Certain of the controlled entities discussed below were consolidated effective July 1, 2014 (see Note 1). As such, transactions with these Consolidated Holding Companies are presented on a consolidated basis.
CP Energy Services Inc.
Prospect owns 100% of the equity of CP Holdings of Delaware LLC (“CP Holdings”), a Consolidated Holding Company. CP Holdings owns 99.8% of the equity of CP Energy Services, Inc. (“CP Energy”), and the remaining equity is owned by CP Energy management. CP Energy owns directly or indirectly 100% of each of CP Well; Wright Foster Disposals, LLC; Foster Testing Co., Inc.; ProHaul Transports, LLC; and Wright Trucking, Inc. CP Energy provides oilfield flowback services and fluid hauling and disposal services through its subsidiaries. In June 2019, CP Energy purchased a controlling interest in the common equity of Spartan Energy Holdings, Inc. (“Spartan Holdings”), which owns 100% of Spartan Energy Services, LLC (“Spartan”) a portfolio company of Prospect with $26,258 in first lien term loans (the “Spartan Term Loans”) due to us as of March 31, 2022. As a result of CP Energy’s purchase, and given Prospect’s controlling interest in CP Energy, our Spartan Term Loans are presented as control investments under CP Energy beginning June 30, 2019. Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loans.
In December 2019, Wolf Energy Holdings, Inc. (“Wolf Energy Holdings”), our Consolidated Holding Company that previously owned 100% of Appalachian Energy LLC (“AEH”); Wolf Energy Services Company, LLC (“Wolf Energy Services”); and Wolf Energy, LLC (collectively our previously controlled membership interest and net profit interest investments in “Wolf Energy”), merged with and into CP Energy, with CP Energy continuing as the surviving entity. CP Energy acquired 100% of our equity investment in Wolf Energy, which is reflected in our valuation of the CP Energy common stock beginning December 31, 2019.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
Interest Income from CP Energy
$
1,321
$
1,171
$
3,901
$
3,460
Interest Income from Spartan
561
296
1,284
901
Total Interest Income
$
1,882
$
1,467
$
5,185
$
4,361
Other Income
Administrative Agent
$
—
$
—
$
6
$
13
Total Other Income
$
—
$
—
$
6
$
13
Realized Gain
$
—
$
—
$
—
$
2,832
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
9,681
$
—
$
9,681
$
26,193
Interest Income Capitalized as PIK
CP Energy
$
1,320
$
1,171
$
3,901
$
3,459
Spartan
558
—
921
—
Total Interest Income Capitalized as PIK
$
1,878
$
1,171
$
4,822
$
3,459
Repayment of Loan Receivable
$
—
$
—
$
—
$
23,361
Return of Capital
—
—
—
1
97
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
As of
March 31, 2022
June 30, 2021
Interest Receivable (1)
$
22
$
18
Other Receivables (2)
159
27
(1) Interest income recognized but not yet paid.
(2) Represents amounts due from CP Energy and Spartan to Prospect for reimbursement of expenses paid by Prospect on behalf of CP Energy and Spartan.
Credit Central Loan Company, LLC
Prospect owns 100% of the equity of Credit Central Holdings of Delaware, LLC (“Credit Central Delaware”), a Consolidated Holding Company. Credit Central Delaware owns 99.01% of the equity of Credit Central Loan Company, LLC (f/k/a Credit Central Holdings, LLC) (“Credit Central”), with entities owned by Credit Central management owning the remaining equity. Credit Central owns 100% of each of Credit Central, LLC; Credit Central South, LLC; Credit Central of Texas, LLC; and Credit Central of Tennessee, LLC. Credit Central is a branch-based provider of installment loans.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
3,781
$
3,650
$
11,182
$
10,569
Managerial Assistance (1)
175
175
525
525
Reimbursement of Legal, Tax, etc.(2)
—
—
1
—
(1) No income recognized by Prospect. MA payments were paid from Credit Central to Prospect and subsequently remitted to PA.
(2) Paid from Credit Central to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to Credit Central (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Accreted Original Issue Discount
$
155
$
115
$
439
$
325
Interest Income Capitalized as PIK
3,007
2,338
6,564
9,044
Repayment of Loan Receivable
—
3,765
—
3,765
As of
March 31, 2022
June 30, 2021
Interest Receivable (3)
$
42
$
38
Other Receivables (4)
2
1
(3) Interest income recognized but not yet paid.
(4) Represents amounts due from Credit Central to Prospect for reimbursement of expenses paid by Prospect on behalf of Credit Central.
98
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
Prospect owns 100% of the membership interests of Echelon Transportation LLC (“Echelon”). Echelon owns 60.7% of the equity of AerLift Leasing Limited (“AerLift”).
During the nine months ended March 31, 2022, Prospect restructured Echelon’s $32,843 First Lien Term Loan into preferred units.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
1,431
$
2,470
$
6,888
$
7,212
Managerial Assistance (1)
63
63
188
125
Reimbursement of Legal, Tax, etc.(2)
—
—
102
—
(1) No income recognized by Prospect. MA payments were paid from Echelon to Prospect and subsequently remitted to PA. (2) Paid from Echelon to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to Echelon (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions (3)
$
—
$
340
$
—
$
865
Interest Income Capitalized as PIK
5,542
4,745
10,646
9,070
(3) During the nine months ended March 31, 2021, Prospect made a follow-on $865 first lien term loan debt.
As of
March 31, 2022
June 30, 2021
Interest Receivable (4)
$
532
$
4,290
Other Receivables (5)
1
1
(4) Interest income recognized but not yet paid.
(5) Represents amounts due from Echelon to Prospect for reimbursement of expenses paid by Prospect on behalf of Echelon.
Energy Solutions Holdings Inc.
Prospect owns 100% of the equity of Energy Solutions Holdings Inc. (f/k/a Gas Solutions Holdings Inc.) (“Energy Solutions”), a Consolidated Holding Company. Energy Solutions owns 100% of each of Change Clean Energy Company, LLC (f/k/a Change Clean Energy Holdings, LLC) (“Change Clean”); Freedom Marine Solutions, LLC (f/k/a Freedom Marine Services Holdings, LLC) (“Freedom Marine”); and Yatesville Coal Company, LLC (f/k/a Yatesville Coal Holdings, LLC) (“Yatesville”). Change Clean owns 100% of each of Change Clean Energy, LLC and Down East Power Company, LLC, and 50.1% of BioChips LLC. Freedom Marine owns 100% of each of Vessel Company, LLC (f/k/a Vessel Holdings, LLC) (“Vessel”); Vessel Company II, LLC (f/k/a Vessel Holdings II, LLC) (“Vessel II”); and Vessel Company III, LLC (f/k/a Vessel Holdings III, LLC) (“Vessel III”). Yatesville owns 100% of North Fork Collieries, LLC.
Energy Solutions owns interests in companies operating in the energy sector. These include companies operating offshore supply vessels, ownership of a non-operating biomass electrical generation plant and several coal mines. Energy Solutions subsidiaries formerly owned interests in gathering and processing business in east Texas.
Transactions between Prospect and Freedom Marine are separately discussed below under “Freedom Marine Solutions, LLC.”
First Tower Finance Company LLC
Prospect owns 100% of the equity of First Tower Holdings of Delaware LLC (“First Tower Delaware”), a Consolidated Holding Company. First Tower Delaware owns 80.03% of First Tower Finance Company LLC (f/k/a First Tower Holdings
99
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
LLC) (“First Tower Finance”). First Tower Finance owns 100% of First Tower, LLC (“First Tower”), a multiline specialty finance company.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
18,180
$
14,970
$
54,959
$
45,752
Other Income
Structuring Fee
$
664
$
5,443
$
7,898
$
15,443
Total Other Income
$
664
$
5,443
$
7,898
$
15,443
Managerial Assistance (1)
$
600
$
600
$
1,800
$
1,800
(1) No income recognized by Prospect. MA payments were paid from First Tower to Prospect and subsequently remitted to PA.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
22,123
$
—
$
22,123
$
—
Interest Income Capitalized as PIK
5,554
463
12,804
463
Repayment of Loan Receivable
9,992
—
11,151
4,899
As of
March 31, 2022
June 30, 2021
Interest Receivable (2)
$
213
$
198
Other Receivables (3)
5
1
(2) Interest income recognized but not yet paid.
(3) Represents amounts due from First Tower to Prospect for reimbursement of expenses paid by Prospect on behalf of First Tower.
Freedom Marine Solutions, LLC
As discussed above, Prospect owns 100% of the equity of Energy Solutions, a Consolidated Holding Company. Energy Solutions owns 100% of Freedom Marine. Freedom Marine owns 100% of each of Vessel, Vessel II, and Vessel III.
As of
March 31, 2022
June 30, 2021
Other Receivables
$
4
$
1
InterDent, Inc.
During the year ended June 30, 2018, Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of InterDent, Inc. (“InterDent”) and to appoint a new Board of Directors of InterDent, all the members of which are our Investment Adviser’s professionals. As a result, Prospect’s investment in InterDent is classified as a control investment.
Effective September 30, 2020, we restructured our investment in InterDent whereby we contributed 100% of the outstanding aggregate principal amount of our First Lien Term Loan C and First Lien Term Loan D to the capital of InterDent. The principal contributions were made gross of all previously accrued and unpaid interest paid-in-kind.
100
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
6,604
$
5,784
$
19,537
$
16,507
Other Income
Structuring Fee
$
200
$
—
$
200
$
—
Total Other Income
$
200
$
—
$
200
$
—
Managerial Assistance (1)
$
366
$
—
$
731
$
—
Reimbursement of Legal, Tax, etc.(2)
—
—
1,443
—
(1) No income recognized by Prospect. MA payments were paid from InterDent to Prospect and subsequently remitted to PA. (2) Paid from InterDent to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to InterDent (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
10,000
$
—
$
17,778
$
—
Interest Income Capitalized as PIK
4,592
4,073
13,563
11,395
Repayment of Loan Receivable
—
—
246
—
As of
March 31, 2022
June 30, 2021
Interest Receivable (3)
$
77
$
67
Other Receivables (4)
15
11
(3) Interest income recognized but not yet paid.
(4) Represents amounts due from InterDent to Prospect for reimbursement of expenses paid by Prospect on behalf of InterDent.
Kickapoo Ranch Pet Resort
Prospect owns 100% of the membership interest of Kickapoo Ranch Pet Resort (“Kickapoo”). Kickapoo is a luxury pet boarding facility.
As of
March 31, 2022
June 30, 2021
Other Receivables (1)
$
7
$
7
(1) Represents amounts due from Kickapoo to Prospect for reimbursement of expenses paid by Prospect on behalf of Kickapoo.
MITY, Inc.
Prospect owns 100% of the equity of MITY Holdings of Delaware Inc. (“MITY Delaware”), a Consolidated Holding Company.
MITY Delaware owns 100% of the equity of MITY, Inc. (f/k/a MITY Enterprises, Inc.) (“MITY”). MITY owns 100% of each of MITY-Lite, Inc. (“MITY-Lite”); Broda USA, Inc. (f/k/a Broda Enterprises USA, Inc.) (“Broda USA”); and Broda Enterprises ULC (“Broda Canada”). MITY is a designer, manufacturer and seller of multipurpose room furniture and specialty healthcare seating products.
During the three months ended December 31, 2016, Prospect formed a separate legal entity, MITY FSC, Inc., (“MITY FSC”) in which Prospect owns 100% of the equity. MITY FSC does not have material operations. This entity earns commission payments from MITY-Lite based on its sales to foreign customers, and distributes it to its shareholder. We recognize such commission, if any, as other income.
101
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
1,844
$
3,603
$
5,421
$
8,392
Other Income
Structuring Fee
$
—
$
66
$
—
$
66
Total Other Income
$
—
$
66
$
—
$
66
Managerial Assistance (1)
$
75
$
—
$
75
$
150
Reimbursement of Legal, Tax, etc.(2)
—
—
10
—
Realized Gain
4
—
10
—
(1) No income recognized by Prospect. MA payments were paid from MITY to Prospect and subsequently remitted to PA. (2) Paid from Mity to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to Mity (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
—
$
2,650
$
—
$
2,650
Interest Income Capitalized as PIK
1,107
1,304
4,383
3,028
Repayment of Loan Receivable
—
(1,142)
—
(850)
As of
March 31, 2022
June 30, 2021
Interest Receivable (3)
$
613
$
19
Other Receivables (4)
5
—
(3) Interest income recognized but not yet paid.
(4) Represents amounts due from MITY to Prospect for reimbursement of expenses paid by Prospect on behalf of MITY.
National Property REIT Corp.
Prospect owns 100% of the equity of NPH Property Holdings, LLC (“NPH”), a consolidated holding company. NPH owns 100% of the common equity of National Property REIT Corp. (“NPRC”).
NPRC is a Maryland corporation and a qualified REIT for federal income tax purposes. In order to qualify as a REIT, NPRC issued 125 shares of Series A Cumulative Non-Voting Preferred Stock to 125 accredited investors. The preferred stockholders are entitled to receive cumulative dividends semi-annually at an annual rate of 12.5% and do not have the ability to participate in the management or operation of NPRC.
NPRC was formed to hold for investment, operate, finance, lease, manage, and sell a portfolio of real estate assets and engage in any and all other activities as may be necessary, incidental or convenient to carry out the foregoing. NPRC acquires real estate assets, including, but not limited to, industrial, commercial, and multi-family properties. NPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity (the “JV”). Additionally, through its wholly owned subsidiaries, NPRC invests in online consumer loans and rated secured structured notes (“RSSN”).
Effective October 31, 2019, we amended the terms of our credit agreement to increase our investment in NPRC and its wholly-owned subsidiaries through a new First Lien Term Loan C (“TLC”). During the three months ended December 31, 2019, we provided $51,428 and $12,857 in TLC and equity financing, respectively. NPRC used the proceeds to fund purchases of rated secured structured notes.
Effective June 19, 2020, we amended and restated the terms of our credit agreement with NPRC, as part of the amendment we increased our investment through a new Term Loan D first lien note in the aggregate principal amount of $183,425 and the
102
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
proceeds were returned to us as a return of capital, reducing our equity investment in NPRC. We received structuring fees of $3,669 as a result of the amendment.
During the nine months ended March 31, 2022, we received partial repayments of $289,882 of our loans previously outstanding with NPRC and provided $268,547 of debt financing and $11,620 of equity financing to NPRC for the acqusition of real estate properties, to fund capital expenditures for existing real estate properties, to provide working capital, to fund purchases of rated secured structured notes, and to support the purchase of high yield corporate debt.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
13,880
$
14,784
$
46,441
$
42,627
Other Income
Structuring Fee
$
1,593
$
904
$
2,815
$
2,337
Royalty/Net Interest
23,112
9,297
43,052
27,134
Total Other Income
$
24,705
$
10,201
$
45,867
$
29,471
Managerial Assistance (1)
$
525
$
525
$
1,575
$
1,575
Reimbursement of Legal, Tax, etc.(2)
585
487
3,296
1,181
(1) No income recognized by Prospect. MA payments were paid from NPRC to Prospect and subsequently remitted to PA.
(2) Paid from NPRC to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to NPRC (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
164,811
$
46,083
$
280,167
$
167,853
Repayment of Loan Receivable
10,000
30,600
289,882
69,350
As of
March 31, 2022
June 30, 2021
Interest Receivable (3)
$
55
$
35
Other Receivables (4)
6
3
(3) Interest income recognized but not yet paid.
(4) Represents amounts due from NPRC to Prospect for reimbursement of expenses paid by Prospect on behalf of NPRC.
Nationwide Loan Company LLC
Prospect owns 100% of the membership interests of Nationwide Acceptance Holdings LLC (“Nationwide Holdings”), a Consolidated Holding Company. Nationwide Holdings owns 94.48% of the equity of Nationwide Loan Company LLC (“Nationwide”), with members of Nationwide management owning the remaining 5.52% of the equity.
On March 24, 2020, Prospect received distributions of $1,500 that were paid from Nationwide Holdings to Prospect and were recognized as a return of capital by Prospect.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
1,013
$
1,013
$
3,084
$
3,081
Dividend Income (1)
400
1,384
2,150
1,384
Managerial Assistance (2)
100
100
300
300
Reimbursement of Legal, Tax, etc. (3)
—
—
9
—
(1) All dividends were paid from earnings and profits of Nationwide.
103
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
(2) No income recognized by Prospect. MA payments were paid from Nationwide to Prospect and subsequently remitted to PA. (3) Paid from Nationwide to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to Nationwide (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income Capitalized as PIK
$
—
$
—
$
—
$
173
Repayment of Loan Receivable
—
(384)
—
(384)
As of
March 31, 2022
June 30, 2021
Interest Receivable (4)
$
11
$
11
Other Receivables (5)
6
2
(4) Interest income recognized but not yet paid.
(5) Represents amounts due from Nationwide to Prospect for reimbursement of expenses paid by Prospect on behalf of Nationwide.
NMMB, Inc.
Prospect owns 100% of the equity of NMMB Holdings, Inc. (“NMMB Holdings”), a Consolidated Holding Company. NMMB Holdings owns 90.42% and 94.82% of the fully-diluted equity of NMMB, Inc. (f/k/a NMMB Acquisition, Inc.) (“NMMB”) as of March 31, 2022 and June 30, 2021, respectively, with NMMB management owning the remaining equity. NMMB owns 100% of Refuel Agency, Inc. (“Refuel Agency”). Refuel Agency owns 100% of Armed Forces Communications, Inc. (“Armed Forces”). NMMB is an advertising media buying business.
On December 30, 2019, NMMB executed a dividend recapitalization whereby Prospect invested $15,100 of a first lien term loan to repay NMMB’s existing term loan, provide a shareholder distribution, and pay fees and expenses. As part of the recapitalization, Prospect converted its Series A and Series B preferred securities into 92.42% common equity and received a dividend distribution of $2,797.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
133
$
130
$
394
$
399
Dividend Income (1)
3,988
—
7,034
—
Other Income
Structuring Fee
$
450
$
—
$
450
$
—
Total Other Income
$
450
$
—
$
450
$
—
Managerial Assistance (2)
$
100
$
100
$
300
$
300
Realized Gain
5,294
—
5,294
—
Reimbursement of Legal, Tax, etc. (3)
26
—
26
—
(1) All dividends were paid from earnings and profits of NMMB.
(2) No income recognized by Prospect. MA payments were paid from NMMB to Prospect and subsequently remitted to PA. (3) Paid from NMMB to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to NMMB (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
104
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
25,000
$
—
$
25,000
$
—
Repayment of loan receivable
Repayment from NMMB
$
12,907
$
38
$
12,983
$
114
Total Repayment of Loan Receivable (4)
$
12,907
$
38
$
12,983
$
114
(4) During the nine months ended March 31, 2022 and March 31, 2021, Prospect received partial repayments totaling $12,983 and $114, respectively, for our First Lien Notes outstanding with NMMB, Inc.
As of
March 31, 2022
June 30, 2021
Interest Receivable (5)
$
9
$
1
Other Receivables (6)
4
—
(5) Interest income recognized but not yet paid.
(6) Represents amounts due from NMMB to Prospect for reimbursement of expenses paid by Prospect on behalf of NMMB.
Pacific World Corporation
Prospect owns 100% of the preferred equity of Pacific World Corporation (“Pacific World”), which represents a 99.97% and 99.97% ownership interest of Pacific World as of March 31, 2022 and June 30, 2021, respectively. As a result, Prospect’s investment in Pacific World is classified as a control investment.
Effective June 30, 2020, we restructured our investment in Pacific World whereby we contributed 100% of the outstanding aggregate principal amount of our First Lien Term Loan B and all but $39,082 of the outstanding aggregate principal amount of our First Lien Term Loan A to the capital of Pacific World. The principal contributions were made gross of all previously accrued and unpaid interest paid-in-kind.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
1,185
$
1,071
$
3,507
$
3,228
Reimbursement of Legal, Tax, etc.
—
2,377
—
2,377
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions (1)
$
—
$
—
$
6,500
$
—
Interest Income Capitalized as PIK
1,194
605
3,363
1,870
(1) During the nine months ended March 31, 2022, Prospect provided $4,000 of debt financing and $2,500 of equity financing to Pacific World to fund working capital needs.
As of
March 31, 2022
June 30, 2021
Interest Receivable (2)
$
32
$
36
Other Receivables (3)
101
37
(2) Interest income recognized but not yet paid.
(3) Represents amounts due from Pacific World to Prospect for reimbursement of expenses paid by Prospect on behalf of Pacific World.
105
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
R-V Industries, Inc.
Prospect owns 87.75% of the fully-diluted equity of R-V Industries, Inc. (“R-V”), with R-V management owning the remaining 11.73% of the equity. On December 15, 2020 we restructured our $28,622 Senior Subordinated Note with R-V into a $28,622 First Lien Note. No realized gain or loss was recorded as a result of the transaction.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
753
$
716
$
2,184
$
2,147
Dividend Income (1)
—
—
441
—
Other Income
Advisory Fee
$
125
$
—
$
125
$
—
Total Other Income
$
125
$
—
$
125
$
—
Managerial Assistance (2)
45
45
135
135
Reimbursement of Legal, Tax, etc.(3)
42
—
46
—
(1) All dividends were paid from earnings and profits of R-V.
(2) No income recognized by Prospect. MA payments were paid from R-V to Prospect and subsequently remitted to PA.
(3) Paid from R-V to PA as reimbursement for legal, tax, and portfolio level accounting services provided directly to R-V (No direct income recognized by Prospect, but we were given a credit for these payments as a reduction to the administrative services payable by Prospect to PA).
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
5,000
$
—
$
5,000
$
—
As of
March 31, 2022
June 30, 2021
Interest Receivable (4)
$
9
$
8
Other Receivables (5)
2
—
(4) Interest income recognized but not yet paid.
(5) Represents amounts due from R-V to Prospect for reimbursement of expenses paid by Prospect on behalf of R-V.
SB Forging Company, Inc.
As of June 30, 2014, Prospect owned 79.53% of the fully-diluted common, 85.76% of the Series A Preferred and 100% of the Series B Preferred equity of ARRM Services, Inc. (f/k/a ARRM Holdings, Inc.) (“ARRM”). ARRM owned 100% of the equity of Ajax Rolled Ring & Machine, LLC (f/k/a Ajax Rolled Ring & Machine, Inc.) (“Ajax”). Ajax forges large seamless steel rings on two forging mills in the company’s York, South Carolina facility. The rings are used in a range of industrial applications, including in construction equipment and power turbines. Ajax also provides machining and other ancillary services.
SB Forging Company II, Inc. (f/k/a Gulf Coast Machine & Supply Company)
Prospect owns 100% of the preferred equity of Gulf Coast Machine & Supply Company (“Gulf Coast”). Gulf Coast is a provider of value-added forging solutions to energy and industrial end markets.
On November 14, 2017, we received proceeds of $1,363 from our insurance carrier related to our investment in Gulfco. The $1,363 reimbursed us for covered third-party legal expenses incurred and expensed in prior periods, for which we recorded the amount received as a reduction to our legal fees for the current period. Prospect Administration also received $1,430 from the insurance carrier related to covered legal services provided by Prospect Administration which was recorded as a reduction of allocation of overhead from Prospect Administration.
106
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
In June 2018, SB Forging Company II, Inc. received escrow proceeds of $2,050 related to the sale. The escrow proceeds and $154 of excess cash held at SB Forging Company II, Inc. were subsequently distributed and in connection with the liquidation of our investment, we recorded a realized gain of $2,204 in our Consolidated Statement of Operations during the year ended June 30, 2019.
Universal Turbine Parts, LLC
On December 10, 2018, UTP Holdings Group, Inc. (“UTP Holdings”) purchased all of the voting stock of Universal Turbine Parts, LLC (“UTP”) and appointed a new Board of Directors to UTP Holdings, consisting of three employees of the Investment Advisor. At the time UTP Holdings acquired UTP, UTP Holdings (f/k/a Harbortouch Holdings of Delaware) was a wholly-owned holding company controlled by Prospect and therefore Prospect’s investment in UTP is classified as a control investment.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
580
$
576
$
1,766
$
1,761
Managerial Assistance (1)
3
3
8
8
Realized Gain
—
121
—
121
(1) No income recognized by Prospect. MA payments were paid from UTP to Prospect and subsequently remitted to PA.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Repayment of Loan Receivable
$
8
$
170
$
24
$
510
As of
March 31, 2022
June 30, 2021
Interest Receivable (2)
$
6
$
6
Other Receivables (3)
17
4
(2) Interest income recognized but not yet paid.
(3) Represents amounts due from UTP to Prospect for reimbursement of expenses paid by Prospect on behalf of UTP.
USES Corp.
On June 15, 2016, we provided additional $1,300 debt financing to USES Corp. (“United States Environmental Services” or “USES”) and its subsidiaries in the form of additional Term Loan A debt and, in connection with such Term Loan A debt financing, USES issued to us 99,900 shares of its common stock. On June 29, 2016, we provided additional $2,200 debt financing to USES and its subsidiaries in the form of additional Term Loan A debt and, in connection with such Term Loan A debt financing, USES issued to us 169,062 shares of its common stock. As a result of such debt financing and recapitalization, as of June 29, 2016, we held 268,962 shares of USES common stock representing a 99.96% common equity ownership interest in USES. As such, USES became a controlled company on June 30, 2016.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
$
50
$
50
$
152
$
51
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions (1)
$
—
$
—
$
—
$
2,000
107
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
(1) During the nine months ended March 31, 2021, Prospect provided $2,000 of new Senior Acquisition Term Loan financing to USES to fund company’s equity investment.
As of
March 31, 2022
June 30, 2021
Interest Receivable (2)
$
1
$
1
Other Receivables (3)
62
—
(2) Interest income recognized but not yet paid.
(3) Represents amounts due from USES to Prospect for reimbursement of expenses paid by Prospect on behalf of USES.
Valley Electric Company, Inc.
Prospect owns 100% of the common stock of Valley Electric Holdings I, Inc. (“Valley Holdings I”), a Consolidated Holding Company. Valley Holdings I owns 100% of Valley Electric Holdings II, Inc. (“Valley Holdings II”), a Consolidated Holding Company. Valley Holdings II owns 94.99% of Valley Electric Company, Inc. (“Valley Electric”), with Valley Electric management owning the remaining 5.01% of the equity. Valley Electric owns 100% of the equity of VE Company, Inc., which owns 100% of the equity of Valley Electric Co. of Mt. Vernon, Inc. (“Valley”), a leading provider of specialty electrical services in the state of Washington and among the top 50 electrical contractors in the United States.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Interest Income
Interest Income from Valley
$
274
$
274
$
834
$
834
Interest Income from Valley Electric
1,505
1,498
4,502
4,495
Total Interest Income
$
1,779
$
1,772
$
5,336
$
5,329
Dividend Income (1)
$
809
$
—
$
2,509
$
2,261
Other Income
Structuring Fee
$
260
$
—
$
260
$
—
Residual Profit Interest
167
167
500
500
Total Other Income
$
427
$
167
$
760
$
500
Managerial Assistance (2)
$
150
$
150
$
450
$
450
(1) All dividends were paid from earnings and profits. (2) No income recognized by Prospect. MA payments were paid from Valley Electric to Prospect and subsequently remitted to PA.
Three Months Ended
Nine Months Ended
March 31, 2022
March 31, 2021
March 31, 2022
March 31, 2021
Additions
$
13,000
$
—
$
13,000
$
—
Interest Income Capitalized as PIK
22
—
22
—
Repayment of loan receivable
15,339
—
15,339
(1,061)
As of
March 31, 2022
June 30, 2021
Interest Receivable (3)
$
26
$
20
Other Receivables (4)
4
2
(3) Interest income recognized but not yet paid.
(4) Represents amounts due from Valley Electric to Prospect for reimbursement of expenses paid by Prospect on behalf of Valley Electric.
108
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Wolf Energy, LLC
Prospect owns 100% of the equity of Wolf Energy Holdings Inc. (“Wolf Energy Holdings”), a Consolidated Holding Company.
Wolf Energy Holdings owns 100% of each of Appalachian Energy LLC (f/k/a Appalachian Energy Holdings, LLC) (“AEH”);
Coalbed, LLC (“Coalbed”); and Wolf Energy, LLC (“Wolf Energy”). AEH owns 100% of C&S Operating, LLC.
Wolf Energy Holdings is a holding company formed to hold 100% of the outstanding membership interests of each of AEH and
Coalbed. The membership interests and associated operating company debt of AEH and Coalbed, which were previously owned
by Manx Energy, Inc. (“Manx”), were assigned to Wolf Energy Holdings effective June 30, 2012. The purpose of assignment was to remove those activities from Manx deemed non-core by the Manx convertible debt investors who were not interested in funding those operations. On June 30, 2012, AEH and Coalbed loans, with a cost basis of $7,991, were assigned by Prospect to Wolf Energy Holdings from Manx.
In December 2019, Wolf Energy Holdings, Inc. (“Wolf Energy Holdings”), our Consolidated Holding Company that previously owned 100% of Appalachian Energy LLC (“AEH”); Wolf Energy Services Company, LLC (“Wolf Energy Services”); and Wolf Energy, LLC (collectively our previously controlled membership interest and net profit interest investments in “Wolf Energy”), merged with and into CP Energy, with CP Energy continuing as the surviving entity. CP Energy acquired 100% of our equity in Wolf Energy, which is reflected in our valuation of CP Energy common stock as of December 31, 2019. During the six months ended December 31, 2019, the cost basis in Wolf Energy Holdings of $3,914 was transferred to CP Energy.
Note 15. Litigation
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such matters as may arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources.
We are not aware of any material legal proceedings as of March 31, 2022.
109
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
Note 16. Financial Highlights
The following is a schedule of financial highlights for the nine months ended March 31, 2022 and March 31, 2021:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Per Share Data
Net asset value per common share at beginning of period
$
10.60
$
8.96
$
9.81
$
8.18
Net investment income(1)
0.22
0.19
0.65
0.56
Net realized and change in unrealized gains(1)
0.20
0.45
0.96
1.33
Net increase from operations
0.42
0.64
1.61
1.89
Distributions of net investment income to preferred stockholders
(0.02)
—
(4)
(0.04)
—
(4)
Net increase from operations applicable to common stockholders
0.40
0.64
1.57
1.89
Distributions of net investment income to common stockholders
(0.18)
(10)
(0.15)
(8)
(0.53)
(10)
(0.48)
(8)
Return of Capital to common stockholders
—
(10)
(0.03)
(8)
(0.01)
(10)
(0.06)
(8)
Common stock transactions(2)
(0.01)
(0.02)
(0.03)
(0.11)
Offering costs from issuance of preferred stock
—
(0.01)
(0.03)
(0.02)
Reclassification of preferred stock issuance costs(9)
—
—
0.03
—
Net asset value per common share at end of period
$
10.81
$
9.38
(5)
$
10.81
$
9.38
(5)
Per common share market value at end of period
$
8.28
$
7.67
$
8.28
$
7.67
Total return based on market value(3)
0.66
%
45.64
%
5.61
%
65.84
%
Total return based on net asset value(3)
4.27
%
7.54
%
17.92
%
26.70
%
Shares of common stock outstanding at end of period
391,718,136
387,400,554
391,718,136
387,400,554
Weighted average shares of common stock outstanding
391,091,485
385,996,921
389,981,608
380,985,329
Ratios/Supplemental Data
Net assets at end of period
$
4,236,011
$
3,701,840
$
4,236,011
$
3,701,840
Portfolio turnover rate
2.56
%
3.19
%
14.08
%
12.17
%
Annualized ratio of operating expenses to average net assets applicable to common shares(7)
9.02
%
9.62
%
9.01
%
10.44
%
Annualized ratio of net investment income to average net assets applicable to common shares(7)
8.31
%
8.20
%
8.40
%
8.46
%
110
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
The following is a schedule of financial highlights for each of the five years ended in the period ended June 30, 2021:
Year Ended June 30,
2021
2020
2019
2018
2017
Per Share Data
Net asset value per common share at beginning of year
$
8.18
$
9.01
$
9.35
$
9.32
$
9.62
Net investment income(1)
0.75
0.72
0.85
0.79
0.85
Net realized and change in unrealized gains (losses)(1)
1.77
(0.76)
(0.46)
0.04
(0.15)
Net increase (decrease) from operations
2.52
(0.04)
0.39
0.83
0.70
Distributions of net investment income to common stockholders
(0.63)
(6)
(0.49)
(6)
(0.72)
(0.77)
(1.00)
Distributions of net investment income to preferred stockholders
—
(4)
—
—
—
—
Return of capital to common stockholders
(0.09)
(8)
(0.23)
(6)
—
—
—
Common stock transactions(2)
(0.11)
(0.07)
(0.01)
(0.03)
—
(4)
Offering costs from issuance of preferred stock
(0.04)
—
—
—
—
Net asset value per common share at end of year
$
9.81
(5)
$
8.18
$
9.01
$
9.35
$
9.32
Per share market value at end of year
$
8.39
$
5.11
$
6.53
$
6.71
$
8.12
Total return based on market value(3)
85.53
%
(11.35
%)
8.23
%
(7.42
%)
16.80
%
Total return based on net asset value(3)
35.52
%
2.84
%
7.17
%
12.39
%
8.98
%
Shares of common stock outstanding at end of year
388,419,573
373,538,499
367,131,025
364,409,938
360,076,933
Weighted average shares of common stock outstanding
382,705,106
368,094,299
365,984,541
361,456,075
358,841,714
Ratios/Supplemental Data
Net assets at end of year
$
3,945,517
$
3,055,861
$
3,306,275
$
3,407,047
$
3,354,952
Portfolio turnover rate
14.64
%
16.46
%
10.86
%
30.70
%
23.65
%
Ratio of operating expenses to average net assets(7)
9.98
%
11.37
%
11.65
%
11.08
%
11.57
%
Ratio of net investment income to average net assets(7)
8.24
%
8.44
%
9.32
%
8.57
%
8.96
%
(1)Per share data amount is based on the basic weighted average number of common shares outstanding for the year/period presented (except for dividends to stockholders which is based on actual rate per share).
(2)Common stock transactions include the effect of our issuance of common stock in public offerings (net of underwriting and offering costs), shares issued in connection with our common stock dividend reinvestment plan, common shares issued to acquire investments, common shares repurchased below net asset value pursuant to our Repurchase Program, and common shares issued pursuant to the Holder Optional Conversion of our 5.50% Preferred Stock.
(3)Total return based on market value is based on the change in market price per share between the opening and ending market prices per share in each period and assumes that common stock dividends are reinvested in accordance with our common stock dividend reinvestment plan. Total return based on net asset value is based upon the change in net asset value per share between the opening and ending net asset values per share in each period and assumes that dividends are reinvested in accordance with our common stock dividend reinvestment plan. For periods less than a year, total return is not annualized.
(4)Amount is less than $0.01.
(5)Does not foot due to rounding.
(6)The amounts reflected for the respective fiscal periods were updated based on tax information received subsequent to our Form 10-K filing for the year ended June 30, 2020 and our Form 10-Q filing for September 30, 2020. Certain reclassifications have been made in the presentation of prior period amounts. See Note 2 and Note 12 within the accompanying notes to the consolidated financial statements for further discussion.
(7)The amounts reflected for the respective fiscal periods do not reflect the effect of dividend payments to preferred shareholders.
(8)The amounts reflected for the respective fiscal periods were updated based on tax information received subsequent to our Form 10-K filing for the year ended June 30, 2021 and our Form 10-Q filing for December 31, 2021. Certain reclassifications have been made in the presentation of prior period amounts. See Note 2 and Note 12 within the accompanying notes to the consolidated financial statements for further discussion.
111
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
(9)Preferred stock issuance costs include offering costs and underwriting costs related to the issuance of preferred stock. During the three months ended December 31, 2021, we have reclassified all preferred stock issuance costs related to preferred stock issued as temporary equity following our reclassification of preferred stock during the three months ended September 30, 2021. Refer to Note 9 within the accompanying notes to the consolidated financial statements for further discussion.
(10)Not finalized for the respective fiscal period. Refer to Note 12.
Note 17. Selected Quarterly Financial Data (Unaudited)
The following table sets forth selected financial data for each quarter within the three years ended June 30, 2022:
Investment Income
Net Investment Income
Net Realized and Unrealized (Losses) Gains
Net Increase (Decrease) in Net Assets from Operations Applicable to Common Stockholders
Quarter Ended
Total
Per Share (1)
Total
Per Share (1)
Total
Per Share (1)
Total
Per Share (1)
September 30, 2019
$
161,883
$
0.44
$
71,060
$
0.19
$
(52,995)
$
(0.14)
$
18,065
$
0.05
December 31, 2019
161,917
0.44
67,885
0.18
(79,088)
(0.21)
(11,203)
(0.03)
March 31, 2020
154,501
0.42
68,476
0.19
(254,175)
(0.70)
(185,699)
(0.51)
June 30, 2020
145,229
0.39
58,273
0.16
104,340
0.28
162,613
0.44
September 30, 2020
$
142,880
$
0.38
$
57,545
$
0.15
$
110,201
$
0.30
$
167,746
$
0.45
December 31, 2020
172,292
0.45
81,561
0.21
224,406
0.60
305,921
0.80
March 31, 2021
159,456
0.41
73,402
0.19
173,006
0.45
246,008
0.64
June 30, 2021
157,339
0.41
73,229
0.19
170,457
0.44
242,421
0.62
September 30, 2021
$
169,474
$
0.44
$
81,369
$
0.21
$
130,762
$
0.34
$
209,724
$
0.54
December 31, 2021
175,376
0.45
85,557
0.22
168,056
0.43
246,411
0.63
March 31, 2022
181,431
0.46
87,005
0.22
77,291
0.20
157,157
0.40
(1)Per share amounts are calculated using the basic weighted average number of common shares outstanding for the period presented and does not reflect the assumed conversion of dilutive securities (basic earnings per common share). The sum of the quarterly per share amounts above will not necessarily equal the per share amounts for the fiscal year.
(2)Amount is less than $0.01.
Note 18. Subsequent Events
Management has evaluated subsequent events through the date of issuance of these financial statements and has determined that there are no subsequent events outside the ordinary scope of business that require adjustment to, or disclosure in, the financial statements other than those disclosed below.
On April 26, 2022, we made a new $18,500 First Lien Term Loan investment and a $75,000 Second Lien Term Loan investment in DTI Holdco, Inc., a technology-enabled e-discovery legal service provider, offering solutions to both corporate and law firm clients. Our investment settled on May 2, 2022.
On May 9, 2022, we announced the declaration of monthly dividends for our 5.50% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.50% of the Stated Value of $25 per share as set forth in the Articles Supplementary for the Preferred Stock, from the date of issuance or, if later from the most recent dividend payment date, as follows:
Monthly Cash 5.50% Preferred Shareholder Distribution
Record Date
Payment Date
Monthly Amount ($ per share), before pro ration for partial periods
June 2022
6/22/2022
7/1/2022
$0.114583
July 2022
7/20/2022
8/1/2022
$0.114583
August 2022
8/17/2022
9/1/2022
$0.114583
112
PROSPECT CAPITAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)(Continued)
(in thousands, except share and per share data)
On February 8, 2022, we announced the declaration of quarterly dividends for our 5.35% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.35% of the Stated Value of $25.00 per share as set forth in the Articles Supplementary for the 5.35% Preferred Stock, from the date of issuance or, if later from the most recent dividend payment date, as follows:
Quarterly Cash 5.35% Preferred Shareholder Distribution
Record Date
Payment Date
Amount ($ per share)
May 2022 - July 2022
7/20/2022
8/1/2022
$0.334375
On May 9, 2022, we announced the declaration of monthly dividends on our common stock as follows:
Monthly Cash Common Shareholder Distribution
Record Date
Payment Date
Amount ($ per share)
May 2022
5/27/2022
6/21/2022
$0.0600
June 2022
6/28/2022
7/20/2022
$0.0600
July 2022
7/27/2022
8/18/2022
$0.0600
August 2022
8/29/2022
9/21/2022
$0.0600
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(All figures in this item are in thousands except share, per share and other data.)
The following discussion should be read in conjunction with our consolidated financial statements and related notes and other financial information appearing elsewhere in this Quarterly Report. In addition to historical information, the following discussion and other parts of this Quarterly Report contain forward-looking information that involves risks and uncertainties. Our actual results may differ significantly from any results expressed or implied by these forward-looking statements due to the factors discussed in Part II, “Item 1A. Risk Factors” and “Forward-Looking Statements” appearing elsewhere herein.
Overview
The terms “Prospect,” “the Company,” “we,” “us” and “our” mean Prospect Capital Corporation and its subsidiaries unless the context specifically requires otherwise.
Prospect is a financial services company that primarily lends to and invests in middle market privately-held companies. We are a closed-end investment company incorporated in Maryland. We have elected to be regulated as a business development company (“BDC”) under the Investment Company Act of 1940 (the “1940 Act”). As a BDC, we have elected to be treated as a regulated investment company (“RIC”), under Subchapter M of the Internal Revenue Code of 1986 (the “Code”). We were organized on April 13, 2004, and were funded in an initial public offering completed on July 27, 2004.
On May 15, 2007, we formed a wholly owned subsidiary Prospect Capital Funding LLC (“PCF”), a Delaware limited liability company and a bankruptcy remote special purpose entity, which holds certain of our portfolio loan investments that are used as collateral for the revolving credit facility at PCF. Our wholly owned subsidiary Prospect Small Business Lending, LLC (“PSBL”) was formed on January 27, 2014, and purchased small business whole loans from online small business loan originators, including On Deck Capital, Inc. (“OnDeck”). On September 30, 2014, we formed a wholly-owned subsidiary Prospect Yield Corporation, LLC (“PYC”) and effective October 23, 2014, PYC holds a portion of our collateralized loan obligations (“CLOs”), which we also refer to as subordinated structured notes (“SSNs”). Each of these subsidiaries have been consolidated since operations commenced.
We consolidate certain of our wholly owned and substantially wholly owned holding companies formed by us in order to facilitate our investment strategy. The following companies are included in our consolidated financial statements and are collectively referred to as the “Consolidated Holding Companies”: CP Holdings of Delaware LLC (“CP Holdings”); Credit Central Holdings of Delaware, LLC (“Credit Central Delaware”); Energy Solutions Holdings Inc.; First Tower Holdings of Delaware LLC (“First Tower Delaware”); MITY Holdings of Delaware Inc. (“MITY Delaware”); Nationwide Acceptance Holdings LLC; NMMB Holdings, Inc. (“NMMB Holdings”); NPH Property Holdings, LLC (“NPH”); Prospect Opportunity Holdings I, Inc. (“POHI”); SB Forging Company, Inc. (“SB Forging”); STI Holding, Inc.; UTP Holdings Group Inc. (“UTP Holdings”); Valley Electric Holdings I, Inc. (“Valley Holdings I”); and Valley Electric Holdings II, Inc. (“Valley Holdings II”).
We are externally managed by our investment adviser, Prospect Capital Management L.P. (“Prospect Capital Management” or the “Investment Adviser”). Prospect Administration LLC (“Prospect Administration”), a wholly-owned subsidiary of the Investment Adviser, provides administrative services and facilities necessary for us to operate.
Our investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. We invest primarily in senior and subordinated secured debt and equity of private companies in need of capital for acquisitions, divestitures, growth, development, recapitalizations and other purposes. We work with the management teams or financial sponsors to seek investments with historical cash flows, asset collateral or contracted pro-forma cash flows.
We currently have four primary strategies that guide our origination of investment opportunities: (1) lending to companies, including companies controlled by private equity sponsors and not controlled by private equity sponsors, and including both directly-originated loans and syndicated loans, (2) lending to companies and purchasing controlling equity positions in such companies, including both operating companies and financial services companies, (3) purchasing controlling equity positions and lending to real estate companies, and (4) investing in structured credit. We may also invest in other strategies and opportunities from time to time that we view as attractive. We continue to evaluate other origination strategies in the ordinary course of business with no specific top-down allocation to any single origination strategy.
114
Lending to Companies - We make directly-originated, agented loans to companies, including companies which are controlled by private equity sponsors and companies that are not controlled by private equity sponsors (such as companies that are controlled by the management team, the founder, a family or public shareholders). This debt can take the form of first lien, second lien, unitranche or unsecured loans. These loans typically have equity subordinate to our loan position. We may also purchase selected equity co-investments in such companies. In addition to directly-originated, agented loans, we also invest in senior and secured loans syndicated loans and high yield bonds that have been sold to a club or syndicate of buyers, both in the primary and secondary markets. These investments are often purchased with a long term, buy-and-hold outlook, and we often look to provide significant input to the transaction by providing anchoring orders. Historically, this strategy has comprised approximately 40%-60% of our portfolio.
Lending to Companies and Purchasing Controlling Equity Positions in Such Companies - This strategy involves purchasing senior and secured yield-producing debt and controlling equity positions in operating companies across various industries. We believe this strategy provides enhanced certainty of closure to sellers and the opportunity for management to continue on in their current roles. These investments are often structured in tax-efficient partnerships, enhancing returns. Historically, this strategy has comprised approximately 15%-25% of our portfolio.
Purchasing Controlling Equity Positions and Lending to Real Estate Companies - We purchase debt and controlling equity positions in tax-efficient real estate investment trusts (“REIT” or “REITs”). The real estate investments of National Property REIT Corp. (“NPRC”) are in various classes of developed and occupied real estate properties that generate current yields, including multi-family properties, and student housing. NPRC seeks to identify properties that have historically significant occupancy rates and recurring cash flow generation. NPRC generally co-invests with established and experienced property management teams that manage such properties after acquisition. Additionally, NPRC makes investments in rated secured structured notes (primarily debt of structured credit). NPRC also purchases loans originated by certain consumer loan facilitators. It purchases each loan in its entirety (i.e., a “whole loan”). The borrowers are consumers, and the loans are typically serviced by the facilitators of the loans. Historically, this overall investment strategy has comprised approximately 10%-20% of our business.
Investing in Structured Credit - We make investments in structured credit, often taking a significant position in subordinated structured notes (equity) and rated secured structured notes (debt). The underlying portfolio of each structured credit investment is diversified across approximately 100 to 200 broadly syndicated loans and does not have direct exposure to real estate, mortgages, or consumer-based credit assets. The structured credit portfolios in which we invest are managed by established collateral management teams with many years of experience in the industry. Historically, this overall strategy has comprised approximately 10%-20% of our portfolio.
We invest primarily in first and second lien secured loans and unsecured debt, which in some cases includes an equity component. First and second lien secured loans generally are senior debt instruments that rank ahead of unsecured debt of a given portfolio company. These loans also have the benefit of security interests on the assets of the portfolio company, which may rank ahead of or be junior to other security interests. Our investments in structured credit are subordinated to senior loans and are generally unsecured. We invest in debt and equity positions of structured credit which are a form of securitization in which the cash flows of a portfolio of loans are pooled and passed on to different classes of owners in various tranches. Our structured credit investments are derived from portfolios of corporate debt securities which are generally risk rated from BB to B.
We hold many of our control investments in a two-tier structure consisting of a holding company and one or more related operating companies for tax purposes. These holding companies serve various business purposes including concentration of management teams, optimization of third-party borrowing costs, improvement of supplier, customer, and insurance terms, and enhancement of co-investments by the management teams. In these cases, our investment, which is generally equity in the holding company, the holding company’s equity investment in the operating company and any debt from us directly to the operating company structure represents our total exposure for the investment. As of March 31, 2022, as shown in our Consolidated Schedule of Investments, the cost basis and fair value of our investments in controlled companies was $2,588,661 and $3,378,505, respectively. This structure gives rise to several of the risks described in our public documents and highlighted elsewhere in this Quarterly Report. We consolidate all wholly owned and substantially wholly owned holding companies formed by us for the purpose of holding our controlled investments in operating companies. There is no significant effect of consolidating these holding companies as they hold minimal assets other than their investments in the controlled operating companies. Investment company accounting prohibits the consolidation of any operating companies.
On June 11, 2021, at a special meeting of our stockholders, our stockholders authorized us to sell shares of our common stock (during the next 12 months) at a price or prices below our net asset value per share at the time of sale in one or more offerings, subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of its outstanding common stock immediately prior to such sale).
115
On March 14, 2022, we filed a notice of meeting and the definitive proxy statement in connection with a special meeting of our stockholders that is scheduled to be held on June 10, 2022 for the purpose of asking our stockholders to vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price or prices below our then current net asset value per share in one or more offerings during the next 12 months following such approval, subject to certain conditions.
Third Quarter Highlights
Investment Transactions
We seek to be a long-term investor with our portfolio companies. During the three months ended March 31, 2022, we acquired $187,393 of new investments, completed follow-on investments in existing portfolio companies totaling approximately $351,117, and recorded PIK interest of $26,317, resulting in gross investment originations of $564,827. During the three months ended March 31, 2022, we received full repayments totaling $96,824, received $4,451 in sales, received $1,552 of revolver paydowns, and received $81,734 in partial prepayments, scheduled principal amortization payments, and return of capital distributions, resulting in net repayments of $184,561.
Debt Issuances and Redemptions
During the three months ended March 31, 2022, we repaid $266 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. In order to replace short maturity debt with longer-term debt, we redeemed $35,084 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 6.38%. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the three months ended March 31, 2022 was $941.
During the three months ended March 31, 2022, we issued $35,587 aggregate principal amount of Prospect Capital InterNotes® with a weighted average stated interest rate of 4.03%, to extend our borrowing base. The newly issued notes mature between February 15, 2025 and March 15, 2052 and generated net proceeds of $34,999.
During the three months ended March 31, 2022, we increased total commitments to the Revolving Credit Facility by $202,500 to $1,500,000 in the aggregate.
Equity Issuances
On January 20, 2022, February 17, 2022, and March 22, 2022, we issued 357,288, 378,344, and 384,588 shares of our common stock in connection with the dividend reinvestment plan, respectively.
During the three months ended March 31, 2022, 2,600 shares of our Series A1 Preferred Stock and 2,000 shares of our Series M1 Preferred Stock were converted to 13,661 shares of our common stock, in connection with Holder Optional Conversions and Optional Redemptions Following Death of a Holder.
During the three months ended March 31, 2022, we issued 4,641,270 shares of our Series A1 Preferred Stock and 862,920 shares of our Series M1 Preferred Stock for net proceeds of $125,355, each excluding offering costs and preferred stock dividend reinvestment.
On January 1, 2022, February 1, 2022, and March 1, 2022, we issued 876, 1,672, and 1,721 shares of our Series A1 and M1 Preferred Stock in connection with the dividend reinvestment plan, respectively.
On March 14, 2022, we filed a notice of meeting and the definitive proxy statement in connection with a special meeting of our stockholders that is scheduled to be held on June 10, 2022 for the purpose of asking our stockholders to vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock at a price or prices below our then current net asset value per share in one or more offerings during the next 12 months following such approval, subject to certain conditions.
Investment Holdings
At March 31, 2022, we have $7,429,931, or 175.4%, of our net assets applicable to common shares invested in 127 long-term portfolio investments and CLOs.
116
Our annualized current yield was 10.6% and 11.7% as of March 31, 2022 and June 30, 2021, respectively, across all performing interest bearing investments, excluding equity investments and non-accrual loans. Our annualized current yield was 8.1% and 9.2% as of March 31, 2022 and June 30, 2021, respectively, across all investments. In many of our portfolio companies we hold equity positions, ranging from minority interests to majority stakes, which we expect over time to contribute to our investment returns. Some of these equity positions include features such as contractual minimum internal rates of returns, preferred distributions, flip structures and other features expected to generate additional investment returns, as well as contractual protections and preferences over junior equity, in addition to the yield and security offered by our cash flow and collateral debt protections.
We are a non-diversified company within the meaning of the 1940 Act. As required by the 1940 Act, we classify our investments by level of control. As defined in the 1940 Act, “Control Investments” are those where there is the ability or power to exercise a controlling influence over the management or policies of a company. Control is generally deemed to exist when a company or individual possesses or has the right to acquire within 60 days or less, a beneficial ownership of 25% or more of the voting securities of an investee company. Under the 1940 Act, “Affiliate Investments” are defined by a lesser degree of influence and are deemed to exist through the possession outright or via the right to acquire within 60 days or less, beneficial ownership of 5% or more of the outstanding voting securities of another person. “Non-Control/Non-Affiliate Investments” are those that are neither Control Investments nor Affiliate Investments.
As of March 31, 2022, we own controlling interests in the following portfolio companies: CP Energy Services Inc. (“CP Energy”); Credit Central Loan Company, LLC (“Credit Central”); Echelon Transportation, LLC (“Echelon”); First Tower Finance Company LLC (“First Tower Finance”); Freedom Marine Solutions, LLC (“Freedom Marine”); InterDent, Inc. (“InterDent”); Kickapoo Ranch Pet Resort (“Kickapoo”); MITY, Inc. (“MITY”); NPRC; Nationwide Loan Company LLC (“Nationwide”); NMMB, Inc. (“NMMB”); Pacific World Corporation (“Pacific World”); R-V Industries, Inc. (“R-V”); Universal Turbine Parts, LLC (“UTP”); USES Corp. (“United States Environmental Services” or “USES”); and Valley Electric Company, Inc. (“Valley Electric”). In June 2019, CP Energy purchased a controlling interest of the common equity of Spartan Energy Holdings, Inc. (“Spartan Holdings”), which owns 100% of Spartan Energy Services, LLC (“Spartan”), a portfolio company of Prospect with $26,258 in senior secured term loans (the “Spartan Term Loan A”) due to us as of March 31, 2022. As a result of CP Energy’s purchase, and given Prospect’s controlling interest in CP Energy, we report our investments in Spartan as control investment. Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loan A.
As of March 31, 2022, we also own affiliated interests in Nixon, Inc. (“Nixon”), PGX Holdings, Inc. (“PGX”), RGIS Services, LLC, (“RGIS”), and Targus Cayman HoldCo Limited (“Targus”).
The following shows the composition of our investment portfolio by level of control as of March 31, 2022 and June 30, 2021:
March 31, 2022
June 30, 2021
Level of Control
Cost
% of Portfolio
Fair Value
% of Portfolio
Cost
% of Portfolio
Fair Value
% of Portfolio
Control Investments
$
2,588,661
37.6
%
$
3,378,505
45.5
%
$
2,482,431
41.0
%
$
2,919,717
47.1
%
Affiliate Investments
237,845
3.5
%
417,652
5.6
%
202,943
3.3
%
356,734
5.8
%
Non-Control/Non-Affiliate Investments
4,061,431
58.9
%
3,633,774
48.9
%
3,372,750
55.7
%
2,925,327
47.1
%
Total Investments
$
6,887,937
100.0
%
$
7,429,931
100.0
%
$
6,058,124
100.0
%
$
6,201,778
100.0
%
117
The following shows the composition of our investment portfolio by type of investment as of March 31, 2022 and June 30, 2021:
March 31, 2022
June 30, 2021
Type of Investment
Cost
% of Portfolio
Fair Value
% of Portfolio
Cost
% of Portfolio
Fair Value
% of Portfolio
First Lien Revolving Line of Credit
$
36,235
0.5
%
$
36,214
0.5
%
$
27,522
0.5
%
$
27,503
0.4
%
First Lien Debt
3,629,580
52.7
%
3,561,170
47.9
%
3,166,861
52.2
%
3,128,845
50.4
%
1.5 Lien Debt
—
—
%
—
—
%
18,164
0.3
%
18,164
0.3
%
Second Lien Debt
1,480,241
21.5
%
1,373,240
18.5
%
1,047,653
17.3
%
959,311
15.5
%
Third Lien Debt
—
—
%
—
—
%
3,950
0.1
%
3,950
0.1
%
Unsecured Debt
7,200
0.1
%
5,719
0.1
%
7,200
0.1
%
3,715
0.1
%
Subordinated Structured Notes
1,016,280
14.8
%
728,833
9.8
%
1,090,175
18.0
%
756,109
12.2
%
Preferred Stock
345,602
5.0
%
62,826
0.8
%
308,713
5.1
%
23,056
0.4
%
Common Stock
192,573
2.8
%
1,223,201
16.5
%
207,661
3.4
%
894,819
14.4
%
Membership Interest
180,226
2.6
%
373,551
5.0
%
180,225
3.0
%
349,942
5.6
%
Participating Interest
—
—
%
65,177
0.9
%
—
—
%
36,364
0.6
%
Total Investments
$
6,887,937
100.0
%
$
7,429,931
100.0
%
$
6,058,124
100.0
%
$
6,201,778
100.0
%
(1)Participating Interest includes our participating equity investments, such as net profits interests, net operating income interests, net revenue interests, and overriding royalty interests.
The following shows our investments in interest bearing securities by type of investment as of March 31, 2022 and June 30, 2021:
March 31, 2022
June 30, 2021
Type of Investment
Cost
% of Portfolio
Fair Value
% of Portfolio
Cost
% of Portfolio
Fair Value
% of Portfolio
First Lien
$
3,665,815
59.4
%
$
3,597,384
63.1
%
$
3,194,383
59.7
%
$
3,156,348
64.4
%
1.5 Lien
—
—
%
—
—
%
18,164
0.3
%
18,164
0.4
%
Second Lien
1,480,241
24.0
%
1,373,240
24.1
%
1,047,653
19.5
%
959,311
19.6
%
Third Lien
—
—
%
—
—
%
3,950
0.1
%
3,950
0.1
%
Unsecured
7,200
0.1
%
5,719
0.1
%
7,200
0.1
%
3,715
0.1
%
Subordinated Structured Notes
1,016,280
16.5
%
728,833
12.7
%
1,090,175
20.3
%
756,109
15.4
%
Total Interest Bearing Investments
$
6,169,536
100.0
%
$
5,705,176
100.0
%
$
5,361,525
100.0
%
$
4,897,597
100.0
%
118
The following shows the composition of our investment portfolio by industry as of March 31, 2022 and June 30, 2021:
March 31, 2022
June 30, 2021
Industry
Cost
% of Portfolio
Fair Value
% of Portfolio
Cost
% of Portfolio
Fair Value
% of Portfolio
Aerospace & Defense
$
108,790
1.6
%
$
67,959
0.9
%
$
98,144
1.6
%
$
84,240
1.4
%
Air Freight & Logistics
125,566
1.8
%
125,566
1.7
%
12,500
0.2
%
12,500
0.2
%
Auto Components
95,334
1.4
%
87,682
1.2
%
75,323
1.2
%
76,520
1.2
%
Building Products
35,000
0.5
%
35,000
0.5
%
—
—
%
—
—
%
Capital Markets
42,500
0.6
%
42,500
0.6
%
—
—
%
—
—
%
Chemicals
—
—
%
—
—
%
28,745
0.5
%
28,863
0.5
%
Commercial Services & Supplies
397,655
5.8
%
336,179
4.5
%
257,617
4.3
%
196,117
3.3
%
Communications Equipment
59,763
0.9
%
59,496
0.8
%
59,709
1.0
%
58,881
0.9
%
Construction & Engineering
67,618
1.0
%
148,367
2.0
%
69,935
1.2
%
149,695
2.4
%
Consumer Finance
559,699
8.1
%
822,754
11.1
%
531,844
8.8
%
771,601
12.4
%
Distributors
275,634
4.0
%
177,819
2.4
%
272,672
4.5
%
175,768
2.8
%
Diversified Consumer Services
246,126
3.6
%
389,013
5.2
%
211,193
3.5
%
339,633
5.5
%
Diversified Financial Services
36,971
0.5
%
36,971
0.5
%
30,165
0.5
%
30,165
0.5
%
Diversified Telecommunication Services
147,233
2.1
%
148,270
2.0
%
66,333
1.1
%
67,448
1.1
%
Energy Equipment & Services
291,730
4.2
%
130,399
1.8
%
277,227
4.6
%
83,204
1.3
%
Entertainment
21,857
0.3
%
22,093
0.3
%
40,585
0.7
%
40,928
0.7
%
Equity Real Estate Investment Trusts (REITs)
574,116
8.3
%
1,358,696
18.2
%
656,911
10.8
%
1,092,955
17.7
%
Food Products
130,959
1.9
%
128,983
1.7
%
61,409
1.0
%
61,948
1.0
%
Health Care Equipment & Supplies
7,482
0.1
%
6,900
0.1
%
7,478
0.1
%
6,721
0.1
%
Health Care Providers & Services
637,437
9.3
%
733,779
9.9
%
583,369
9.6
%
714,107
11.5
%
Health Care Technology
64,838
0.9
%
64,838
0.9
%
—
—
%
—
—
%
Hotels, Restaurants & Leisure
23,514
0.3
%
23,119
0.3
%
24,502
0.4
%
23,624
0.4
%
Household Durables
118,712
1.7
%
119,650
1.6
%
12,913
0.2
%
15,403
0.2
%
Household Products
20,999
0.3
%
20,999
0.3
%
21,186
0.3
%
21,186
0.3
%
Insurance
21,952
0.3
%
22,280
0.3
%
21,911
0.4
%
22,280
0.4
%
Interactive Media & Services
242,681
3.5
%
242,681
3.3
%
180,127
3.0
%
180,127
2.9
%
Internet & Direct Marketing Retail
59,695
0.9
%
59,298
0.8
%
54,677
0.9
%
56,114
0.9
%
IT Services
286,711
4.2
%
286,667
3.9
%
260,899
4.3
%
261,718
4.3
%
Leisure Products
44,869
0.7
%
44,705
0.6
%
20,242
0.3
%
20,287
0.3
%
Machinery
109,065
1.6
%
127,878
1.7
%
97,853
1.6
%
111,682
1.8
%
Media
108,551
1.6
%
132,239
1.8
%
105,958
1.7
%
107,819
1.7
%
Online Lending
29,080
0.4
%
29,080
0.4
%
6,600
0.1
%
6,600
0.1
%
Paper & Forest Products
11,454
0.2
%
9,457
0.1
%
15,847
0.3
%
15,815
0.3
%
Personal Products
259,108
3.8
%
56,787
0.8
%
249,245
4.1
%
71,097
1.1
%
Professional Services
111,955
1.6
%
111,368
1.5
%
132,015
2.2
%
132,058
2.1
%
Software
52,281
0.8
%
52,500
0.7
%
22,240
0.4
%
22,500
0.4
%
Technology Hardware, Storage & Peripherals
12,443
0.2
%
12,500
0.2
%
12,431
0.2
%
12,500
0.2
%
Textiles, Apparel & Luxury Goods
226,255
3.3
%
260,059
3.5
%
202,312
3.3
%
225,359
3.6
%
Trading Companies & Distributors
65,224
0.9
%
25,767
0.3
%
65,248
1.1
%
27,106
0.4
%
Transportation Infrastructure
—
—
%
—
—
%
30,384
0.5
%
30,900
0.5
%
Subtotal
$
5,730,857
83.2
%
$
6,560,298
88.4
%
$
4,877,749
80.5
%
$
5,355,469
86.4
%
Structured Finance(1)
$
1,157,080
16.8
%
$
869,633
11.6
%
$
1,180,375
19.5
%
$
846,309
13.6
%
Total Investments
$
6,887,937
100.0
%
$
7,429,931
100.0
%
$
6,058,124
100.0
%
$
6,201,778
100.0
%
(1) Our SSN investments do not have industry concentrations and as such have been separated in the tables above. As of March 31, 2022 and June 30, 2021, Structured Finance includes $140,800 and $90,200, respectively, of senior secured debt investments held through our investment in NPRC and its wholly-owned subsidiary.
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Portfolio Investment Activity
Our origination efforts are focused primarily on secured lending to non-control investments to reduce the risk in the portfolio by investing primarily in first lien loans, though we also continue to close select junior debt and equity investments. For information regarding investment activity for the nine months ended March 31, 2022 and March 31, 2021 are presented below:
Nine months ended March 31,
2022
2021
Investments made in new portfolio companies
$
997,817
$
459,277
Follow-on investments made in existing portfolio companies (1)
777,022
259,111
Revolver advances
9,000
4,000
PIK interest (2)
61,030
58,750
Total acquisitions
$
1,844,869
$
781,138
Acquisitions by portfolio composition
First Lien Debt
$
1,021,834
$
575,545
Second Lien Debt
796,351
176,780
Subordinated Structured Notes
9,518
—
Unsecured Debt
—
2,620
Equity
17,166
26,193
Total acquisitions by portfolio composition
$
1,844,869
$
781,138
Investments sold
$
4,451
$
—
Partial repayments (3)
401,201
148,951
Full repayments
545,333
513,636
Revolver paydowns
1,636
3,291
Total dispositions
$
952,621
$
665,878
Dispositions by portfolio composition
First Lien Debt
$
592,601
$
364,083
1.5 Lien Debt
18,164
—
Second Lien Debt
300,292
249,421
Third Lien Debt
3,950
—
Unsecured Debt
—
53,738
Subordinated Structured Notes
9,406
—
Equity
28,208
(1,364)
Total dispositions by portfolio composition
$
952,621
$
665,878
Weighted average interest rates for new investments by portfolio composition (4)
First Lien Debt
8.30
%
9.32
%
Second Lien Debt
9.54
%
9.41
%
(1) Includes follow-on investments in existing portfolio companies and refinancings, if any.
(2) During the nine months ended March 31, 2022, approximately $56,824 of PIK interest capitalized was accrued as interest income and the remaining $4,206 is included due to the timing of interest payment dates and resulting capitalization occurring in the current year. During the nine months ended March 31, 2021, approximately $53,729 of PIK interest capitalized was accrued as interest income and the remaining $5,021 was included due to the timing of interest payment dates and resulting capitalization occurring during the prior year.
(3) Includes partial prepayments of principal, scheduled amortization payments, impairments, and refinancings, if any.
(4) Weighted average interest rates for new investments by portfolio composition is calculated with the current rate at the end of the period. In addition, Revolving Line of Credit and Delayed Draw Term Loans are excluded from the calculation.
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Investment Valuation
Investments for which market quotations are readily available are typically valued at such market quotations. In order to validate market quotations, management and the independent valuation firm look at a number of factors to determine if the quotations are representative of fair value, including the source and nature of the quotations. In determining the range of values for debt instruments where market quotations are not available, except CLOs and debt investments in controlling portfolio companies, management and the independent valuation firm estimated corporate and security credit ratings and identified corresponding yields to maturity for each loan from relevant market data. A discounted cash flow technique was then applied using the appropriate yield to maturity as the discount rate, to determine a range of values. In determining the range of values for debt investments of controlled companies and equity investments, the enterprise value was determined by applying a market approach such as using earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples, net income and/or book value multiples for similar guideline public companies and/or similar recent investment transactions and/or an income approach, such as the discounted cash flow technique. The enterprise value technique may also be used to value debt investments which are credit impaired. For stressed debt and equity investments, asset recovery analysis was used.
In determining the range of values for our investments in CLOs, the independent valuation firm uses a discounted multi-path cash flow model. The valuations were accomplished through the analysis of the CLO deal structures to identify the risk exposures from the modeling point of view as well as to determine an appropriate call date (i.e., expected maturity). These risk factors are sensitized in the multi-path cash flow model using Monte Carlo simulations, which are simulations used to model the probability of different outcomes, to generate probability-weighted (i.e., multi-path) cash flows for the underlying assets and liabilities. These cash flows are discounted using appropriate market discount rates, and relevant data in the CLO market and certain benchmark credit indices are considered, to determine the value of each CLO investment. In addition, we generate a single-path cash flow utilizing our best estimate of expected cash receipts, and assess the reasonableness of the implied discount rate that would be effective for the value derived from the corresponding multi-path cash flow model.
With respect to our online consumer and SME lending initiative, we invest primarily in marketplace loans through marketplace lending platforms. We do not conduct loan origination activities ourselves. Therefore, our ability to purchase consumer and SME loans, and our ability to grow our portfolio of consumer and SME loans, are directly influenced by the business performance and competitiveness of the marketplace loan origination business of the marketplace lending platforms from which we purchase consumer and SME loans. In addition, our ability to analyze the risk-return profile of consumer and SME loans is significantly dependent on the marketplace platforms’ ability to effectively evaluate a borrower’s credit profile and likelihood of default. If we are unable to effectively evaluate borrowers’ credit profiles or the credit decisioning and scoring models implemented by each platform, we may incur unanticipated losses which could adversely impact our operating results.
The Board of Directors looked at several factors in determining where within the range to value the asset including: recent operating and financial trends for the asset, independent ratings obtained from third parties, comparable multiples for recent sales of companies within the industry and discounted cash flow models for our investments in CLOs. The composite of all these various valuation techniques, applied to each investment, was a total valuation of $7,429,931.
Our portfolio companies are generally lower middle-market companies, outside of the financial sector, with less than $100,000 of annual EBITDA. We believe our investment portfolio has experienced less volatility than others because we believe there are more buy and hold investors who own these less liquid investments.
Impact of the novel coronavirus (the “COVID-19”) pandemic
As of March 31, 2022, there remains to be global uncertainty surrounding the COVID-19 pandemic, which has caused severe disruptions in the global economy and has negatively impacted the fair value and performance of certain investments since the pandemic began. For the three months ended March 31, 2022, the aggregate increases in fair value and net unrealized depreciation on investments were driven by the expansion of comparable company trading multiples and/or tightened credit spreads as the level of market volatility generated by the COVID-19 pandemic declined over the three month period. For certain investments in our portfolio, the valuations continue to reflect factors such as specific industry concerns, uncertainty about the duration of business shutdowns and near-term liquidity needs.
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Control Company Investments
Control investments offer increased risk and reward over straight debt investments. Operating results and changes in market multiples can result in dramatic changes in values from quarter to quarter. Significant downturns in operations can further result in our looking to recoveries on sales of assets rather than the enterprise value of the investment. Equity positions in our portfolio are susceptible to potentially significant changes in value, both increases as well as decreases, due to changes in operating results and market multiples. Our controlled companies discussed below experienced such changes and we recorded corresponding fluctuations in valuations during the nine months ended March 31, 2022.
CP Energy Services, Inc.
Prospect owns 100% of the equity of CP Holdings, a Consolidated Holding Company. CP Holdings owns 99.8% of the equity of CP Energy, and the remaining equity is owned by CP Energy management. CP Energy provides oilfield flowback services and fluid hauling and disposal services through its subsidiaries.
In June 2019, CP Energy purchased a controlling interest in the common equity of Spartan Energy Holdings, Inc. (“Spartan Holdings”), which owns 100% of Spartan Energy Services, LLC (“Spartan”) a portfolio company of Prospect with $26,258 in first lien term loans (the “Spartan Term Loans”) due to us as of March 31, 2022. As a result of CP Energy’s purchase, and given Prospect’s controlling interest in CP Energy, our Spartan Term Loans are presented as control investments under CP Energy beginning June 30, 2019. Spartan remains the direct borrow and guarantor to Prospect for the Spartan Term Loans.
The fair value of our investment in CP Energy increased to $118,461 as of March 31, 2022, which is a discount of $128,777 from its amortized cost, compared to a fair value of $71,487 as of June 30, 2021, representing a discount of $161,249 to its amortized cost. The decrease in discount to amortized cost resulted from improved performance and increased activity in the oil and gas industry
Echelon Transportation, LLC
Prospect owns 100% of the equity of Echelon, a consolidated holding company. Echelon owns 60.7% of the equity of AerLift. Echelon is an aircraft leasing company.
The fair value of our investment in Echelon decreased to $67,959 as of March 31, 2022, representing a discount of $40,831 to its amortized cost basis, compared to a fair value of $84,240 as of June 30, 2021, representing a discount of $13,904 to its amortized cost basis. The increase in discount to amortized cost resulted from lower aircraft residual values.
First Tower Finance Company LLC
Prospect owns 100% of the equity of First Tower Delaware, a consolidated holding company. First Tower Delaware owns 80.03% of First Tower Finance. First Tower Finance owns 100% of First Tower, LLC (“First Tower”), a multiline specialty finance company.
The fair value of our investment in First Tower increased to $645,156 as of March 31, 2022, representing a premium of $265,526 to its amortized cost basis compared to a fair value of $592,356 as of June 30, 2021, a premium of $236,502 to its amortized cost. The increase in premium to amortized cost was driven by strong financial performance.
InterDent, Inc.
During the year ended June 30, 2018, Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of InterDent and to appoint a new Board of Directors of InterDent, all the members of which are our Investment Adviser’s professionals. As a result, Prospect’s investment in InterDent is classified as a control investment. InterDent is a dental support organization (“DSO”). InterDent provides business and administrative support services to a regionally-diversified set of dental practices so that dentists can focus on delivering high-quality clinical care and patient satisfaction.
The fair value of our investment in InterDent decreased to $409,757 as of March 31, 2022, a premium of $95,973 to its amortized cost basis compared to a fair value of $412,339 as of June 30, 2021, a premium of $129,650 to its amortized cost. The decrease in premium to amortized cost was driven by a decline in financial performance.
National Property REIT Corp.
NPRC is a Maryland corporation and a qualified REIT for federal income tax purposes. NPRC is held for purposes of investing, operating, financing, leasing, managing and selling a portfolio of real estate assets and engages in any and all other activities that may be necessary, incidental, or convenient to perform the foregoing. NPRC acquires real estate assets, including, but not
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limited to, industrial, commercial, and multi-family properties, self-storage, and student housing properties. NPRC may acquire real estate assets directly or through joint ventures by making a majority equity investment in a property-owning entity. Additionally, through its wholly owned subsidiaries, NPRC invests in online consumer loans and RSSNs. As of March 31, 2022, we own 100% of the fully-diluted common equity of NPRC.
During the nine months ended March 31, 2022, we received partial repayments of $289,882 of our loans previously outstanding with NPRC and provided $268,547 of debt financing and $11,620 of equity financing to NPRC for the acqusition of real estate properties, to fund capital expenditures for existing real estate properties, to provide working capital, to fund purchases of rated secured structured notes, and to support the purchase of high yield corporate debt.
The online consumer loan investments held by certain of NPRC’s wholly owned subsidiaries are unsecured obligations of individual borrowers that are issued in amounts ranging from $1 to $50, with fixed terms ranging from 36 to 84 months. As of March 31, 2022, the outstanding investment in online consumer loans by certain of NPRC’s wholly-owned subsidiaries was comprised of 626 individual loans, residual interest in four securitizations, and one high yield corporate bond, and had an aggregate fair value of $40,279. The average outstanding individual loan balance is approximately $4 and the loans mature on dates ranging from April 1, 2022 to April 19, 2025 with a weighted-average outstanding term of 14 months as of March 31, 2022. Fixed interest rates range from 6.0% to 36.0% with a weighted-average current interest rate of 20.0%. As of March 31, 2022, our investment in NPRC and its wholly-owned subsidiaries relating to online consumer lending had a fair value of $29,080.
As of March 31, 2022, based on outstanding principal balance, 24.1% of the portfolio was invested in super prime loans (borrowers with a Fair Isaac Corporation (“FICO”) score, of 720 or greater), 38.5% of the portfolio in prime loans (borrowers with a FICO score of 660 to 719) and 37.5% of the portfolio in near prime loans (borrowers with a FICO score of 580 to 659, a portion of which are considered sub-prime).
Loan Type
Outstanding Principal Balance
Fair Value
Interest Rate Range
Weighted Average Interest Rate*
Super Prime
$
545
$
539
8.0% - 20.5%
12.4%
Prime
871
841
6.0% - 25.0%
18.3%
Near Prime
848
854
17.0% - 36.0%
26.7%
*Weighted by outstanding principal balance of the online consumer loans.
The rated secured structured note investments held by certain of NPRC’s wholly owned subsidiaries are subordinated debt interests in broadly syndicated loans managed by established collateral management teams with many years of experience in the industry. As of March 31, 2022, the outstanding investment in rated secured structured notes by certain of NPRC’s wholly owned subsidiaries was comprised of 58 investments with a fair value of $303,060 and face value of $315,813. The average outstanding note is approximately $5,445 with an expected maturity date ranging from April 2026 to January 2032 and weighted-average expected maturity of 7 years as of March 31, 2022. Coupons range from three-month LIBOR (“3ML”) plus 5.31% to 9.45% with a weighted-average coupon of 3ML + 7.1%. As of March 31, 2022, our investment in NPRC and its wholly-owned subsidiaries relating to rated secured structured notes had a fair value of $140,800.
As of March 31, 2022, based on outstanding notional balance, 17.8% of the portfolio was invested in Single - B rated tranches and 82.2% of the portfolio in BB rated tranches.
As of March 31, 2022, our investment in NPRC and its wholly-owned subsidiaries had an amortized cost of $743,996 and a fair value of $1,528,576, including our investment in online consumer lending and rated secured structured notes as discussed above. The fair value of $1,358,696 related to NPRC’s real estate portfolio was comprised of forty-seven multi-family properties, eight student housing properties and three commercial properties. The following table shows the location, acquisition date, purchase price, and mortgage outstanding due to other parties for each of the properties held by NPRC as of March 31, 2022
No.
Property Name
City
Acquisition Date
Purchase Price
Mortgage Outstanding
1
Filet of Chicken
Forest Park, GA
10/24/2012
$
7,400
$
—
2
Arlington Park Marietta, LLC
Marietta, GA
5/8/2013
14,850
13,494
3
Taco Bell, OK
Yukon, OK
6/4/2014
1,719
—
4
Taco Bell, MO
Marshall, MO
6/4/2014
1,405
—
5
Abbie Lakes OH Partners, LLC
Canal Winchester, OH
9/30/2014
12,600
15,144
6
Kengary Way OH Partners, LLC
Reynoldsburg, OH
9/30/2014
11,500
15,310
7
Lakeview Trail OH Partners, LLC
Canal Winchester, OH
9/30/2014
26,500
29,207
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No.
Property Name
City
Acquisition Date
Purchase Price
Mortgage Outstanding
8
Lakepoint OH Partners, LLC
Pickerington, OH
9/30/2014
11,000
16,620
9
Sunbury OH Partners, LLC
Columbus, OH
9/30/2014
13,000
16,852
10
Heatherbridge OH Partners, LLC
Blacklick, OH
9/30/2014
18,416
24,093
11
Jefferson Chase OH Partners, LLC
Blacklick, OH
9/30/2014
13,551
18,749
12
Goldenstrand OH Partners, LLC
Hilliard, OH
10/29/2014
7,810
11,431
13
SSIL I, LLC
Aurora, IL
11/5/2015
34,500
25,488
14
Vesper Tuscaloosa, LLC
Tuscaloosa, AL
9/28/2016
54,500
42,748
15
Vesper Iowa City, LLC
Iowa City, IA
9/28/2016
32,750
24,654
16
Vesper Corpus Christi, LLC
Corpus Christi, TX
9/28/2016
14,250
10,726
17
Vesper Campus Quarters, LLC
Corpus Christi, TX
9/28/2016
18,350
14,077
18
Vesper College Station, LLC
College Station, TX
9/28/2016
41,500
31,837
19
Vesper Kennesaw, LLC
Kennesaw, GA
9/28/2016
57,900
50,704
20
Vesper Statesboro, LLC
Statesboro, GA
9/28/2016
7,500
7,480
21
Vesper Manhattan KS, LLC
Manhattan, KS
9/28/2016
23,250
14,679
22
9220 Old Lantern Way, LLC
Laurel, MD
1/30/2017
187,250
153,580
23
7915 Baymeadows Circle Owner, LLC
Jacksonville, FL
10/31/2017
95,700
76,560
24
8025 Baymeadows Circle Owner, LLC
Jacksonville, FL
10/31/2017
15,300
12,240
25
23275 Riverside Drive Owner, LLC
Southfield, MI
11/8/2017
52,000
54,591
26
23741 Pond Road Owner, LLC
Southfield, MI
11/8/2017
16,500
18,934
27
150 Steeplechase Way Owner, LLC
Largo, MD
1/10/2018
44,500
36,668
28
Olentangy Commons Owner LLC
Columbus, OH
6/1/2018
113,000
92,876
29
Villages of Wildwood Holdings LLC
Fairfield, OH
7/20/2018
46,500
39,525
30
Falling Creek Holdings LLC
Richmond, VA
8/8/2018
25,000
25,374
31
Crown Pointe Passthrough LLC
Danbury, CT
8/30/2018
108,500
89,400
32
Lorring Owner LLC
Forestville, MD
10/30/2018
58,521
47,680
33
Hamptons Apartments Owner, LLC
Beachwood, OH
1/9/2019
96,500
79,520
34
5224 Long Road Holdings, LLC
Orlando, FL
6/28/2019
26,500
21,200
35
Druid Hills Holdings LLC
Atlanta, GA
7/30/2019
96,000
79,104
36
Bel Canto NPRC Parcstone LLC
Fayetteville, NC
10/15/2019
45,000
42,793
37
Bel Canto NPRC Stone Ridge LLC
Fayetteville, NC
10/15/2019
21,900
21,545
38
Sterling Place Holdings LLC
Columbus, OH
10/28/2019
41,500
34,196
39
SPCP Hampton LLC
Dallas, TX
11/2/2020
36,000
27,590
40
Palmetto Creek Holdings LLC
North Charleston, SC
11/10/2020
33,182
25,865
41
Valora at Homewood Holdings LLC
Homewood, AL
11/19/2020
81,250
63,844
42
NPRC Fairburn LLC
Fairburn, GA
12/14/2020
52,140
43,900
43
NPRC Grayson LLC
Grayson, GA
12/14/2020
47,860
40,500
44
NPRC Taylors LLC
Taylors, SC
1/27/2021
18,762
14,075
45
Parkside at Laurel West Owner LLC
Spartanburg, SC
2/26/2021
57,005
42,025
46
Willows at North End Owner LLC
Spartanburg, SC
2/26/2021
23,255
19,000
47
SPCP Edge CL Owner LLC
Webster, TX
3/12/2021
34,000
25,496
48
Jackson Pear Orchard LLC
Ridgeland, MS
6/28/2021
50,900
38,175
49
Jackson Lakeshore Landing LLC
Ridgeland, MS
6/28/2021
22,600
16,950
50
Jackson Reflection Pointe LLC
Flowood, MS
6/28/2021
45,100
31,050
51
Jackson Crosswinds LLC
Pearl, MS
6/28/2021
41,400
33,825
52
Elliot Apartments Norcross, LLC
Norcross, GA
11/30/2021
128,000
98,800
53
Orlando 442 Owner, LLC (West Vue Apartments)
Orlando, FL
12/30/2021
97,500
73,000
54
NPRC Wolfchase LLC
Memphis, TN
3/18/2022
82,100
60,000
55
NPRC Twin Oaks LLC
Hattiesburg. MS
3/18/2022
44,850
33,830
56
NPRC Lancaster LLC
Birmingham, AL
3/18/2022
37,550
28,350
57
NPRC Rutland LLC
Macon, GA
3/18/2022
29,750
22,500
58
Southport Owner LLC (Southport Crossing)
Indianapolis, IN
3/29/2022
48,100
36,075
$
2,525,726
$
2,083,929
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The fair value of our investment in NPRC increased to $1,528,576 as of March 31, 2022, a premium of $784,580 from its amortized cost basis compared to a fair value of $1,189,755 as of June 30, 2021, representing a premium of $436,044. The increase in premium is primarily driven by compression of capitalization rates and, to a lesser extent, growth in net operating income in our real estate portfolio.
NMMB, Inc.
Prospect owns 100% of the equity of NMMB Holdings, Inc. (“NMMB Holdings”), a Consolidated Holding Company. NMMB Holdings owns 90.42% and 94.82% of the fully-diluted equity of NMMB, Inc. (f/k/a NMMB Acquisition, Inc.) (“NMMB”) as of March 31, 2022 and June 30, 2021, respectively, with NMMB management owning the remaining equity. NMMB owns 100% of Refuel Agency, Inc. (“Refuel Agency”). Refuel Agency owns 100% of Armed Forces Communications, Inc. (“Armed Forces”). NMMB is an advertising media buying business.
The fair value of our investment in NMMB increased to $80,268 as of March 31, 2022, representing a premium of $50,508 to its amortized cost basis, compared to a fair value of $46,888 as of June 30, 2021, representing a premium of $29,145 to its amortized cost basis. The increase to the premium was driven by strong financial performance.
Pacific World Corporation
On May 29, 2018, Prospect exercised its rights and remedies under its loan documents to exercise the shareholder voting rights in respect of the stock of Pacific World Corporation (“Pacific World”) and to appoint a new Board of Directors of Pacific World. As a result, as of June 30, 2018, Prospect’s investment in Pacific World is classified as a control investment. Pacific World supplies nail and beauty care products to food, drug, mass, and value retail channels worldwide.
The fair value of our investment in Pacific World decreased to $56,787 as of March 31, 2022, representing a discount of $202,321 to its amortized cost basis, compared to a fair value of $71,097 as of June 30, 2021, representing discount of $178,148 to its amortized cost. The increase in discount to amortized cost resulted from a decline in financial performance.
Our controlled investments, including those discussed above, are valued at $789,844 above their amortized cost as of March 31, 2022.
Affiliate and Non-Control Company Investments
We hold four affiliate investments at March 31, 2022 (PGX Holdings, Inc. (“Progrexion”), Nixon, Inc., RGIS Services, LLC, (“RGIS”), and Targus Cayman HoldCo Limited (“Targus”)) with a total fair value of $417,652, a premium of $179,807 from their combined amortized cost as of March 31, 2022, compared to a fair value of $356,734 as of June 30, 2021, representing a $153,791 premium to its amortized cost. The increase in premium is primarily driven by our investment in Progrexion, which is valued at a premium of $141,123 at March 31, 2022 compared to a premium of $126,933 as of June 30, 2021. The increase in Progrexion’s premium to amortized cost was driven by strong financial performance.
With the non-control/non-affiliate investments, generally, there is less volatility related to our total investments because our equity positions tend to be smaller than with our control/affiliate investments, and debt investments are generally not as susceptible to large swings in value as equity investments. For debt investments, the fair value is generally limited on the high side to each loan’s par value, plus any prepayment premium that could be imposed. However, as of March 31, 2022, two of our non-control/ non-affiliate investments, Engine Group, Inc. (“Engine”) and USC are valued at discounts to amortized cost of $26,820 and $97,446, respectively. As of March 31, 2022, our CLO investment portfolio is valued at a $287,447 discount to amortized cost. Excluding Engine, USC, and the CLO investment portfolio, the fair value of our non-control/non-affiliate investments at March 31, 2022 are valued at $15,944 below their amortized cost and did not experience significant changes in operating performance or value.
Our largest non-control/non-affiliate investment is PeopleConnect Holdings, LLC (“PeopleConnect”), which has a fair value equal to its amortized cost basis of $242,681 and represents approximately 5.7% of our Net Asset Value as of March 31, 2022. PeopleConnect is an online information commerce company.
Capitalization
Our investment activities are capital intensive and the availability and cost of capital is a critical component of our business. We capitalize our business with a combination of debt and equity. Our debt as of March 31, 2022 consists of: a Revolving Credit Facility availing us of the ability to borrow debt subject to borrowing base determinations; Convertible Notes which we issued in April 2017 (with a follow-on issuance in May 2018) and March 2019; Public Notes which we issued in March 2013, October 2018, January 2021, May 2021 and September 2021; and Prospect Capital InterNotes® which we issue from time to time. As of March 31, 2022, our equity capital is comprised of common and preferred equity.
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The following table shows our outstanding debt as of March 31, 2022:
Principal Outstanding
Unamortized Discount & Debt Issuance Costs
Net Carrying Value
Fair Value(1)
Effective Interest Rate
Revolving Credit Facility(2)
$
699,440
$
11,504
$
699,440
(3)
$
699,440
1ML+2.05%
(6)
2022 Notes
60,501
121
60,380
60,751
(4)
5.63
%
(7)
2025 Notes
156,168
2,673
153,495
167,009
(4)
6.63
%
(7)
Convertible Notes
216,669
213,875
227,760
2023 Notes
284,219
804
283,415
290,847
(4)
6.07
%
(7)
6.375% 2024 Notes
81,240
339
80,901
83,502
(4)
6.57
%
(7)
2026 Notes
400,000
7,600
392,400
378,172
(4)
3.98
%
(7)
3.364% 2026 Notes
300,000
6,342
293,658
275,646
(4)
3.60
%
(7)
3.437% 2028 Notes
300,000
8,516
291,484
258,249
(4)
3.64
%
(7)
Public Notes
1,365,459
1,341,858
1,286,416
Prospect Capital InterNotes®
340,774
7,196
333,578
361,624
(5)
5.73
%
(8)
Total
$
2,622,342
$
2,588,751
$
2,575,240
(1)As permitted by ASC 825-10-25, we have not elected to value our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® at fair value. The fair value of these debt obligations are categorized as Level 2 under ASC 820 as of March 31, 2022.
(2)The maximum draw amount of the Revolving Credit facility as of March 31, 2022 is $1,500,000.
(3)Net Carrying Value excludes deferred financing costs associated with the Revolving Credit Facility. See Critical Accounting Policies and Estimates for accounting policy details.
(4)We use available market quotes to estimate the fair value of the Convertible Notes and Public Notes.
(5)The fair value of Prospect Capital InterNotes® is estimated by discounting remaining payments using current Treasury rates plus spread based on observable market inputs.
(6)Represents the rate on drawn down and outstanding balances. Deferred debt issuance costs are amortized on a straight-line method over the stated life of the obligation.
(7)The effective interest rate is equal to the effect of the stated interest, the accretion of original issue discount and amortization of debt issuance costs.
(8)For the Prospect Capital InterNotes®, the rate presented is the weighted average effective interest rate. Interest expense and deferred debt issuance costs, which are amortized on a straight-line method over the stated life of the obligation which approximates level yield, are weighted against the average year-to-date principal balance.
The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of March 31, 2022:
Payments Due by Period
Total
Less than 1 Year
1 – 3 Years
3 – 5 Years
After 5 Years
Revolving Credit Facility
$
699,440
$
—
$
—
$
699,440
$
—
Convertible Notes
216,669
60,501
156,168
—
—
Public Notes
1,365,459
284,219
81,240
700,000
300,000
Prospect Capital InterNotes®
340,774
—
2,161
88,361
250,252
Total Contractual Obligations
$
2,622,342
$
344,720
$
239,569
$
1,487,801
$
550,252
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The following table shows the contractual maturities of our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® as of June 30, 2021:
Payments Due by Period
Total
Less than 1 Year
1 – 3 Years
3 – 5 Years
After 5 Years
Revolving Credit Facility
$
356,937
$
—
$
—
$
356,937
$
—
Convertible Notes
267,223
—
111,055
156,168
—
Public Notes
1,134,778
—
365,608
400,000
369,170
Prospect Capital InterNotes®
508,711
—
11,744
51,822
445,145
Total Contractual Obligations
$
2,267,649
$
—
$
488,407
$
964,927
$
814,315
We may from time to time seek to cancel or purchase our outstanding debt through cash purchases and/or exchanges, in open market purchases, privately negotiated transactions or otherwise. The amounts involved may be material. In addition, we may from time to time enter into additional debt facilities, increase the size of existing facilities or issue additional debt securities, including secured debt, unsecured debt and/or debt securities convertible into common stock. Any such purchases or exchanges of outstanding debt would be subject to prevailing market conditions, our liquidity requirements, contractual and regulatory restrictions and other factors.
Historically, we have funded a portion of our cash needs through borrowings from banks, issuances of senior securities, including secured, unsecured and convertible debt securities, or issuances of common equity. For flexibility, we maintain a universal shelf registration statement that allows for the public offering and sale of our debt securities, common stock, preferred stock, subscription rights, and warrants and units to purchase such securities up to an indeterminate amount. We may from time to time issue securities pursuant to the shelf registration statement or otherwise pursuant to private offerings. The issuance of debt or equity securities will depend on future market conditions, funding needs and other factors and there can be no assurance that any such issuance will occur or be successful.
Each of our Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Unsecured Notes”) are our general, unsecured obligations and rank equal in right of payment with all of our existing and future unsecured indebtedness and will be senior in right of payment to any of our subordinated indebtedness that may be issued in the future. The Unsecured Notes are effectively subordinated to our existing secured indebtedness, such as our credit facility, and future secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally subordinated to any existing and future liabilities and other indebtedness of any of our subsidiaries.
Revolving Credit Facility
On August 29, 2014, we renegotiated our previous credit facility and closed an expanded five and a half year revolving credit facility (the “2014 Facility”). The lenders had extended commitments of $885,000 under the 2014 Facility as of June 30, 2018. The 2014 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate. Interest on borrowings under the 2014 Facility was one-month LIBOR plus 225 basis points. Additionally, the lenders charged a fee on the unused portion of the 2014 Facility equal to either 50 basis points if at least 35% of the credit facility was drawn or 100 basis points otherwise.
On August 1, 2018, we renegotiated the 2014 Facility and closed an expanded five and a half year revolving credit facility (the “2018 Facility”). The lenders have extended commitments of $1,132,500 as of June 30, 2019. The 2018 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On September 9, 2019, we amended the 2018 Facility and closed an expanded revolving credit facility (the “2019 Facility”). The lenders had extended commitments of $1,077,500 as of March 31, 2021. The 2019 Facility included an accordion feature which allowed commitments to be increased up to $1,500,000 in the aggregate.
On April 28, 2021, we amended the 2019 Facility and closed an expanded five year revolving credit facility (the “2021 Facility” and collectively with the 2014 Facility, the 2018 Facility, and the 2019 Facility, the “Revolving Credit Facility”). The lenders had extended commitments of $1,500,000 as of March 31, 2022. The 2021 Facility includes an accordion feature which allows commitments to be increased up to $1,500,000 in the aggregate. The Revolving Credit Facility matures on April 27, 2026. It includes a revolving period that extends through April 27, 2025, followed by an additional one-year amortization period, with distributions allowed to Prospect after the completion of the revolving period. During such one-year amortization period, all principal payments on the pledged assets will be applied to reduce the balance. At the end of the one-year amortization period, the remaining balance will become due, if required by the lenders.
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The Revolving Credit Facility contains restrictions pertaining to the geographic and industry concentrations of funded loans, maximum size of funded loans, interest rate payment frequency of funded loans, maturity dates of funded loans and minimum equity requirements. The Revolving Credit Facility also contains certain requirements relating to portfolio performance, including required minimum portfolio yield and limitations on delinquencies and charge-offs, violation of which could result in the early termination of the Revolving Credit Facility. The Revolving Credit Facility also requires the maintenance of a minimum liquidity requirement. As of March 31, 2022, we were in compliance with the applicable covenants.
Interest on borrowings under the 2021 Facility is one-month LIBOR plus 205 basis points. Additionally, the lenders charge a fee on the unused portion of the credit facility equal to either 40 basis points if more than 60% of the credit facility is drawn, or 70 basis points if more than 35% and an amount less than or equal to 60% of the credit facility is drawn, or 150 basis points if an amount less than or equal to 35% of the credit facility is drawn. The 2021 Facility requires us to pledge assets as collateral in order to borrow under the credit facility.
For the nine months ended March 31, 2022 and March 31, 2021, the average stated interest rate (i.e., rate in effect plus the spread) and average outstanding borrowings for the Revolving Credit Facility were as follows:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Average stated interest rate
2.14%
2.32%
2.14%
2.35%
Average outstanding balance
$737,280
$373,734
$546,080
$376,646
As of March 31, 2022 and June 30, 2021, we had $730,410 and $640,853, respectively, available to us for borrowing under the Revolving Credit Facility, net of $699,440 and $356,937 outstanding borrowings as of the respective balance sheet dates. As of March 31, 2022, the investments, including cash and cash equivalents, used as collateral for the Revolving Credit Facility had an aggregate fair value of $2,559,645, which represents 34.3% of our total investments, including cash and cash equivalents. These assets are held and owned by PCF, a bankruptcy remote special purpose entity, and, as such, these investments are not available to our general creditors. As additional eligible investments are transferred to PCF and pledged under the Revolving Credit Facility, PCF will generate additional availability up to the current commitment amount of $1,500,000. The release of any assets from PCF requires the approval of the facility agent.
In connection with the origination and amendments of the Revolving Credit Facility, we incurred $18,746 of new fees and $7,509 were carried over from the previous facilities, all of which are being amortized over the term of the facility in accordance with ASC 470-50. As of March 31, 2022, $11,504 remains to be amortized and is reflected as deferred financing costs on the Consolidated Statements of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $6,452 and $4,509, respectively, of interest costs, unused fees and amortization of financing costs on the Revolving Credit Facility as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $16,153 and $13,772, respectively, of interest costs, unused fees and amortization of financing costs on the Revolving Credit Facility as interest expense.
Convertible Notes
On April 11, 2017, we issued $225,000 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “Original 2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Original 2022 Notes bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2017. Total proceeds from the issuance of the Original 2022 Notes, net of underwriting discounts and offering costs, were $218,010. On May 18, 2018, we issued an additional $103,500 aggregate principal amount of convertible notes that mature on July 15, 2022 (the “Additional 2022 Notes,” and together with the Original 2022 Notes, the “2022 Notes”), unless previously converted or repurchased in accordance with their terms. The Additional 2022 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2022 Notes and bear interest at a rate of 4.95% per year, payable semi-annually on January 15 and July 15 each year, beginning July 15, 2018. Total proceeds from the issuance of the Additional 2022 Notes, net of underwriting discounts and offering costs, were $100,749.
On October 18, 2019, we repurchased $22,941 aggregate principal amount of the 2022 Notes at a price of $102.8 including commissions. As a result of this transaction, we recorded a loss of $1,072 in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt
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issuance costs. On November 7, 2019, we commenced a tender offer to purchase for cash up to $50,000 aggregate principal amount of the 2022 Notes (“2022 Notes November Tender Offer”). On December 7, 2019, $13,432 aggregate principal amount of the 2022 Notes, representing 4.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes November Tender Offer resulted in our recognizing a loss of $599, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
On December 23, 2019, we commenced a tender offer to purchase for cash up to $25,000 aggregate principal amount of the 2022 Notes (“2022 Notes December Tender Offer”). On January 22, 2020, $1,302 aggregate principal amount of the 2022 Notes, representing 0.5% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December Tender Offer resulted in our recognizing a loss of $51 during the three months ended March 31, 2020. During the three months ended March 31, 2020, we repurchased an additional $32,585 aggregate principal amount of the 2022 Notes at a weighted average price of $89.1 including commissions. As a result of this transaction, we recorded a gain of $3,045, in the amount of the difference between the reacquisition price and the net carrying amount of the 2022 Notes, net of the proportionate amount of unamortized debt issuance costs.
On July 23, 2020, we commenced a tender offer to purchase for cash up to $100,000 aggregate principal amount of the 2022 Notes (“2022 Notes July Tender Offer”). On August 19, 2020, $29,420 aggregate principal amount of the 2022 Notes, representing 11.4% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes July Tender Offer resulted in our recognizing a loss of $396 during the three months ended September 30, 2020.
On September 3, 2020, we commenced a tender offer to purchase for cash up to $228,820 aggregate principal amount of the 2022 Notes at the purchase price of $101.00, plus accrued and unpaid interest (“2022 Notes September Tender Offer”). On October 1, 2020, $6,035 aggregate principal amount of the 2022 Notes, representing 2.64% of the previously outstanding 2022 Notes, were validly tendered and accepted. On October 19, 2020, we commenced a tender offer to purchase for cash any and all of the $222,785 aggregate principal amount outstanding of the 2022 Notes at the purchase price of $102.625, plus accrued and unpaid interest (“2022 Notes October Tender Offer”). On November 16, 2020, $59,863 aggregate principal amount of the 2022 Notes, representing 26.87% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes September Tender Offer and the 2022 Notes October Tender Offer resulted in our recognizing a loss of $2,433 during the three months ended December 31, 2020.
On December 16, 2020, we commenced a tender offer to purchase for cash any and all of the $162,922 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.50, plus accrued and unpaid interest (“2022 Notes December 2020 Tender Offer”). On January 15, 2021, $26,694 aggregate principal amount of the 2022 Notes, representing 16.38% of the previously outstanding 2022 Notes, were validly tendered and accepted. On February 1, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $103.00, plus accrued and unpaid interest (“2022 Notes February 2021 Tender Offer”). On March 2, 2021, $25,123 aggregate principal amount of the 2022 Notes, representing 18.44% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes December 2020 Tender Offer and the 2022 Notes February 2021 Tender Offer resulted in our recognizing a loss of $2,225 during the three months ended March 31, 2021.
On March 16, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.00, plus accrued and unpaid interest (“2022 Notes March 2021 Tender Offer”). On April 13, 2021, $50 aggregate principal amount of the 2022 Notes, representing 0.05% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes March 2021 Tender Offer resulted in our recognizing a loss of $1.
On August 26, 2021, we commenced a tender offer to purchase for cash up to $60,000 aggregate principal outstanding amount of the 2022 Notes at the purchase price of $102.50, plus accrued and unpaid interest (“2022 Notes August 2021 Tender Offer”). On September 24, 2021, $50,554 aggregate principal amount of the 2022 Notes, representing 45.52% of the previously outstanding 2022 Notes, were validly tendered and accepted. The 2022 Notes August 2021 Tender Offer resulted in our recognizing a loss of $1,584. As of March 31, 2022, the outstanding aggregate principal amount of the 2022 Notes is $60,501.
On March 1, 2019, we issued $175,000 aggregate principal amount of senior convertible notes that mature on March 1, 2025 (the “2025 Notes”), unless previously converted or repurchased in accordance with their terms. We granted the underwriters a 13-day over-allotment option to purchase up to an additional $26,250 aggregate principal amount of the 2025 Notes. The underwriters fully exercised the over-allotment option on March 11, 2019 and we issued $26,250 aggregate principal amount of 2025 Notes at settlement on March 13, 2019. The 2025 Notes bear interest at a rate of 6.375% per year, payable semi-annually on March 1 and September 1 each year, beginning September 1, 2019. Total proceeds from the issuance of the 2025 Notes, net of underwriting discounts and offering costs, were $198,674.
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On December 28, 2020, we commenced a tender offer to purchase for cash up to $20,000 aggregate principal amount of the 2025 Notes at the purchase price of $111.00, plus accrued and unpaid interest (“2025 Notes December 2020 Tender Offer”). On January 27, 2021, $20,000 aggregate principal amount of the 2025 Notes, representing 9.94% of the previously outstanding 2025 Notes, were validly tendered and accepted. The 2025 Notes December 2020 Tender Offer resulted in our recognizing a loss of $2,676 during the three months ended March 31, 2021. On February 16, 2021, we repurchased an additional $25,082 aggregate principal amount of the 2025 Notes, representing 13.84% of the previously outstanding 2025 Notes, at a price of $107.50, including commissions. As a result of this transaction, we recorded a loss of $2,466, in the amount of the difference between the reacquisition price and the net carrying amount of the 2025 Notes, net of the proportionate amount of unamortized debt issuance costs. As of March 31, 2022, the outstanding aggregate principal amount of the 2025 Notes is $156,168.
Certain key terms related to the convertible features for the 2022 Notes, and the 2025 Notes (collectively, the “Convertible Notes”) are listed below.
2022 Notes
2025 Notes
Initial conversion rate(1)
100.2305
110.7420
Initial conversion price
$
9.98
$
9.03
Conversion rate at March 31, 2022(1)(2)
100.2305
110.7420
Conversion price at March 31, 2022(2)(3)
$
9.98
$
9.03
Last conversion price calculation date
4/11/2021
3/1/2022
Dividend threshold amount (per share)(4)
$
0.083330
$
0.060000
(1)Conversion rates denominated in shares of common stock per $1 principal amount of the Convertible Notes converted.
(2)Represents conversion rate and conversion price, as applicable, taking into account certain de minimis adjustments that will be made on the conversion date.
(3)The conversion price will increase only if the current monthly dividends (per share) exceed the dividend threshold amount (per share).
(4)The conversion rate is increased if monthly cash dividends paid to common shares exceed the monthly dividend threshold amount, subject to adjustment. Current dividend rates are at or below the minimum dividend threshold amount for further conversion rate adjustments for all bonds.
Interest accrues from the date of the original issuance of the Convertible Notes or from the most recent date to which interest has been paid or duly provided. Upon conversion, the holder will receive a separate cash payment with respect to the notes surrendered for conversion representing accrued and unpaid interest to, but not including, the conversion date. Any such payment will be made on the settlement date applicable to the relevant conversion on the Convertible Notes. If a holder converts the Convertible Notes after a record date for an interest payment but prior to the corresponding interest payment date, the holder will receive shares of our common stock based on the conversion formula described above, a cash payment representing accrued and unpaid interest through the record date in the normal course and a separate cash payment representing accrued and unpaid interest from the record date to the conversion date.
No holder of Convertible Notes will be entitled to receive shares of our common stock upon conversion to the extent (but only to the extent) that such receipt would cause such converting holder to become, directly or indirectly, a beneficial owner (within the meaning of Section 13(d) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder) of more than 5.0% of the shares of our common stock outstanding at such time. The 5.0% limitation shall no longer apply following the effective date of any fundamental change. We will not issue any shares in connection with the conversion or redemption of the Convertible Notes which would equal or exceed 20% of the shares outstanding at the time of the transaction in accordance with NASDAQ rules.
Subject to certain exceptions, holders may require us to repurchase, for cash, all or part of their Convertible Notes upon a fundamental change at a price equal to 100% of the principal amount of the Convertible Notes being repurchased plus any accrued and unpaid interest up to, but excluding, the fundamental change repurchase date. In addition, upon a fundamental change that constitutes a non-stock change of control we will also pay holders an amount in cash equal to the present value of all remaining interest payments (without duplication of the foregoing amounts) on such Convertible Notes through and including the maturity date.
In connection with the issuance of the Convertible Notes, we recorded a discount of $3,369 and debt issuance costs of $9,035 which are being amortized over the terms of the Convertible Notes. As of March 31, 2022, $1,643 of the original issue discount
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and $1,151 of the debt issuance costs remain to be amortized and is included as a reduction within Convertible Notes on the Consolidated Statement of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $3,550 and $4,870, respectively, of interest costs and amortization of financing costs on the Convertible Notes as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $11,333 and $17,905, respectively, of interest costs and amortization of financing costs on the Covertible Notes as interest expense.
Public Notes
On March 15, 2013, we issued $250,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “Original 2023 Notes”). The Original 2023 Notes bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2013. Total proceeds from the issuance of the Original 2023 Notes, net of underwriting discounts and offering costs, were $243,641. On June 20, 2018, we issued an additional $70,000 aggregate principal amount of unsecured notes that mature on March 15, 2023 (the “Additional 2023 Notes”, and together with the Original 2023 Notes, the “2023 Notes”). The Additional 2023 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2023 Notes and bear interest at a rate of 5.875% per year, payable semi-annually on March 15 and September 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the Additional 2023 Notes, net of underwriting discounts, were $69,403.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $105.00, plus accrued and unpaid interest (“2023 Notes November Tender Offer”). On December 15, 2020, $36,644 aggregate principal amount of the 2023 Notes were tendered, of which, $30,000 aggregate principal amount, representing 9.38% of the previously outstanding 2023 Notes, were validly accepted pursuant to the applicable 2023 Notes November Tender Offer (applying a proration factor of approximately 82.27%). The 2023 Notes November Tender Offer resulted in our recognizing a loss of $1,694 during the three months ended December 31, 2020.
On March 9, 2021, we commenced a tender offer to purchase for cash any and all of the $290,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.25, plus accrued and unpaid interest (“2023 Notes March 9, 2021 Tender Offer”). On March 15, 2021, $4,219 aggregate principal amount of the 2023 Notes were tendered, representing 1.45% of the previously outstanding 2023 Notes. On March 23, 2021, we commenced a tender offer to purchase for cash any and all of the $285,781 aggregate principal amount of the 2023 Notes at the purchase price of $104.20, plus accrued and unpaid interest (“2023 Notes March 23, 2021 Tender Offer”). On March 29, 2021, $726 aggregate principal amount of the 2023 Notes were tendered, representing 0.25% of the previously outstanding 2023 Notes. The 2023 Notes March 9, 2021 Tender Offer and the 2023 Notes March 23, 2021 Tender Offer resulted in our recognizing a loss of $234 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 2023 Notes at the purchase price of $104.15, plus accrued and unpaid interest (“2023 Notes April 2021 Tender Offer”). On May 4, 2021, $836 aggregate principal amount of the 2023 Notes were tendered, representing 0.29% of the previously outstanding 2023 Notes. The 2023 Notes April 2021 Tender Offer resulted in our recognizing a loss of $43 during the three months ended June 30, 2021. As of March 31, 2022, the outstanding aggregate principal amount of the 2023 Notes is $284,219.
On December 10, 2015, we issued $160,000 aggregate principal amount of unsecured notes that mature on June 15, 2024 (the “2024 Notes”). The 2024 Notes bore interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15 and December 15 of each year, beginning March 15, 2016. Total proceeds from the issuance of the 2024 Notes, net of underwriting discounts and offering costs, were $155,043. On June 16, 2016, we entered into an at-the-market (“ATM”) program with FBR Capital Markets & Co., through which we could sell, by means of ATM offerings, from time to time, up to $100,000 in aggregate principal amount of our existing 2024 Notes (“Initial 2024 Notes ATM”). Following the Initial 2024 Notes ATM, the aggregate principal amount of the 2024 Notes issued was $199,281 for net proceeds of $193,253, after commissions and offering costs. On July 2, 2018, we entered into a second ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of the 2024 Notes (“Second 2024 Notes ATM”). Prior to the February 2021 full redemption discussed below, the 2024 Notes were listed on the New York Stock Exchange (“NYSE”) and traded thereon under the ticker “PBB”.
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During the year ended June 30, 2019, we issued an additional $35,162 aggregate principal amount under the Second 2024 Notes ATM, for net proceeds of $34,855, after commissions and offering costs. On March 20, 2020, we commenced a tender offer to purchase for cash any and all of the $234,443 aggregate principal amount of the 2024 Notes (“2024 Notes March Tender Offer”). On March 31, 2020, $655 aggregate principal amount of the 2024 Notes, representing 0.3% of the previously outstanding 2024 Notes, were validly tendered and accepted. The 2024 Notes March Tender Offer resulted in our recognizing a gain of $203 during the three months ended March 31, 2020.
On February 16, 2021, we redeemed $233,788 of the aggregate principal amount of the 2024 Notes. The transaction resulted in our recognizing a loss of $3,391 during the three months ended March 31, 2021. Following the redemption, none of the 2024 Notes remained outstanding.
On June 7, 2018, we issued $55,000 aggregate principal amount of unsecured notes that mature on June 15, 2028 (the “2028 Notes”). The 2028 Notes bear interest at a rate of 6.25% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning September 15, 2018. Total proceeds from the issuance of the 2028 Notes, net of underwriting discounts and offering costs were $53,119. On July 2, 2018, we entered into an ATM program with B. Riley FBR, Inc. and BB&T Capital Markets, and on August 31, 2018 with Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2028 Notes (“2028 Notes ATM” or “2028 Notes Follow-on Program”). The 2028 Notes are listed on the NYSE and trade thereon under the ticker “PBY.” During the year ended June 30, 2019, we issued an additional $15,761 aggregate principal amount under the 2028 Notes ATM, for net proceeds of $15,530, after commissions and offering costs.
On June 15, 2021, we redeemed $70,761 of the aggregate principal amount of the 2028 Notes. The transaction resulted in our recognizing a loss of $1,934 during the three months ended June 30, 2021. Following the redemption, none of the 2028 Notes remained outstanding.
On October 1, 2018, we issued $100,000 aggregate principal amount of unsecured notes that mature on January 15, 2024 (the “6.375% 2024 Notes”). The 6.375% 2024 Notes bear interest at a rate of 6.375% per year, payable semi-annually on January 15 and July 15 of each year, beginning January 15, 2019. Total proceeds from the issuance of the 6.375% 2024 Notes, net of underwriting discounts and offering costs, were $98,985.
On November 17, 2020, we commenced a tender offer to purchase for cash up to $10,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.00, plus accrued and unpaid interest (“6.375% 2024 Notes November Tender Offer”). On December 15, 2020, $11,848 aggregate principal amount of the 6.375% 2024 Notes were tendered, of which, $10,000 aggregate principal amount, representing 10% of the previously outstanding 6.375% 2024 Notes, were validly accepted pursuant to the applicable 6.375% 2024 Notes Tender Offer (applying a proration factor of approximately 84.56%). The 6.375% 2024 Notes November Tender Offer resulted in our recognizing a loss of $866 during the three months ended December 31, 2020.
On March 2, 2021, we commenced a tender offer to purchase for cash any and all of the $90,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $109.00, plus accrued and unpaid interest (“6.375% 2024 Notes March 2, 2021 Tender Offer”). On March 8, 2021, $7,738 aggregate principal amount of the 6.375% 2024 Notes, representing 8.60% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. On March 16, 2021, we commenced a tender offer to purchase for cash any and all of the $82,262 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $108.75, plus accrued and unpaid interest (“6.375% 2024 Notes March 16, 2021 Tender Offer”). On March 22, 2021, $647 aggregate principal amount of the 6.375% 2024 Notes, representing 0.79% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes March 2, 2021 Tender Offer and the 6.375% 2024 Notes March 16, 2021 Tender Offer resulted in our recognizing a loss of $806 during the three months ended March 31, 2021.
On April 7, 2021, we commenced a tender offer to purchase for cash up to $30,000 aggregate principal amount of the 6.375% 2024 Notes at the purchase price of $107.50, plus accrued and unpaid interest (“6.375% 2024 Notes April 2021 Tender Offer”). On May 4, 2021, $226 aggregate principal amount of the 6.375% 2024 notes, representing 0.28% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes April 2021 Tender Offer resulted in our recognizing a loss of $18 during the three months ended June 30, 2021.
On October 8, 2021, we commenced a tender offer to purchase for cash any and all of the $81,389 aggregate principal amount of the 6.375% 2024 Notes at a purchase price of $107.75, plus accrued and unpaid interest (“6.375% 2024 Notes October 2021 Tender Offer”). On October 15, 2021, $149 aggregate principal amount of the 6.375% 2024 Notes, representing 0.18% of the previously outstanding 6.375% 2024 Notes, were validly tendered and accepted. The 6.375% 2024 Notes October 2021 Tender Offer resulted in our recognizing a loss of $12. As of March 31, 2022, the outstanding aggregate principal amount of the 6.375% 2024 Notes is $81,240.
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On December 5, 2018, we issued $50,000 aggregate principal amount of unsecured notes that mature on June 15, 2029 (the “2029 Notes”). The 2029 Notes bear interest at a rate of 6.875% per year, payable quarterly on March 15, June 15, September 15, and December 15 of each year, beginning March 15, 2019. Total proceeds from the issuance of the 2029 Notes, net of underwriting discounts and offering costs, were $48,057. On February 9, 2019, we entered into an ATM program with B. Riley FBR, Inc., BB&T Capital Markets, and Comerica Securities, Inc., through which we could sell, by means of ATM offerings, up to $100,000 in aggregate principal amount of our existing 2029 Notes (“2029 Notes ATM” or “2029 Notes Follow-on Program”). The 2029 Notes are listed on the NYSE and trade thereon under the ticker “PBC.” During the year ended June 30, 2019, we issued an additional $19,170 aggregate principal amount under the 2029 Notes ATM, for net proceeds of $18,523, after commissions and offering costs. On December 30, 2021, we redeemed $69,170 of the aggregate principal amount of the 2029 Notes. The transaction resulted in our recognizing a loss of $2,044 during the three months ended December 31, 2021. Following the redemption, none of the 2029 Notes remained outstanding.
On January 22, 2021, we issued $325,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Original 2026 Notes”). The Original 2026 Notes bear interest at a rate of 3.706% per year, payable semi-annually on July 22, and January 22 of each year, beginning on July 22, 2021. Total proceeds from the issuance of the 2026 Notes, net of underwriting discounts and offering costs, were $317,720. On February 19, 2021, we issued an additional $75,000 aggregate principal amount of unsecured notes that mature on January 22, 2026 (the “Additional 2026 Notes”, and together with the Original 2026 Notes, the “2026 Notes”). The Additional 2026 Notes were a further issuance of, and are fully fungible and rank equally in right of payment with, the Original 2026 Notes and bear interest at a rate of 3.706% per year, payable semi-annually on July 22 and January 22 of each year, beginning July 22, 2021. Total proceeds from the issuance of the Additional 2026 Notes, net of underwriting discounts and offering costs, were $74,061. As of March 31, 2022, the outstanding aggregate principal amount of the 2026 Notes is $400,000.
On May 27, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on November 15, 2026 (the “3.364% 2026 Notes”). The 3.364% 2026 Notes bear interest at a rate of 3.364% per year, payable semi-annually on November 15, and May 15 of each year, beginning on November 15, 2021. Total proceeds from the issuance of the 3.364% 2026 Notes, net of underwriting discounts and offering costs, were $293,283. As of March 31, 2022, the outstanding aggregate principal amount of the 3.364% 2026 Notes is $300,000.
On September 30, 2021, we issued $300,000 aggregate principal amount of unsecured notes that mature on October 15, 2028 (the “3.437% 2028 Notes”). The 3.437% 2028 Notes bear interest at a rate of 3.437% per year, payable semi-annually on April 15 and October 15 of each year, beginning on April 15, 2022. Total proceeds from the issuance of the 3.437% 2028 Notes, net of underwriting discounts and offering costs, were $291,798. As of March 31, 2022, the outstanding aggregate principal amount of the 3.437% 2028 Notes is $300,000.
The 2023 Notes, the 6.375% 2024 Notes, the 2026 Notes, the 3.364% 2026 Notes, and the 3.437% 2028 Notes (collectively, the “Public Notes”) are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding.
In connection with the issuance of the Public Notes we recorded a discount of $15,802 and debt issuance costs of $17,834, which are being amortized over the term of the notes. As of March 31, 2022, $11,854 of the original issue discount and $11,747 of the debt issuance costs remain to be amortized and are included as a reduction within Public Notes on the Consolidated Statement of Assets and Liabilities.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $15,581 and $12,879, respectively, of interest costs and amortization of financing costs on the Public Notes as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $46,336 and $38,441, respectively, of interest costs and amortization of financing costs on the Public Notes as interest expense.
Prospect Capital InterNotes®
On February 16, 2012, we entered into a selling agent agreement (the “Original Selling Agent Agreement”) with InspereX LLC (formerly known as “Incapital LLC”), as purchasing agent for our issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®, which was increased to $1,500,000 in May 2014. On May 10, 2019, the Original Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “May 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes®.
On September 16, 2019, the May 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “September 2019 Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $500,000 of Prospect Capital InterNotes®. We sold approximately $1,700,000 in aggregate principal amount of
133
Prospect Capital InterNotes® under the Original Selling Agent Agreement, May 2019 Selling Agent Agreement, and September 2019 Selling Agent Agreement (collectively the “Previous Selling Agent Agreements”).
On February 13, 2020, the September 2019 Selling Agent Agreement was terminated, and we entered into a new selling agent agreement with InspereX LLC (the “Selling Agent Agreement”), authorizing the issuance and sale from time to time of up to $1,000,000 of Prospect Capital InterNotes® (collectively with the previously authorized selling agent agreements, the “InterNotes® Offerings”). Additional agents may be appointed by us from time to time in connection with the InterNotes® Offering and become parties to the Selling Agent Agreement. We have, from time to time, repurchased certain notes issued through the InterNotes® Offerings and, therefore, as of March 31, 2022, $340,774 aggregate principal amount of Prospect Capital InterNotes® were outstanding.
These notes are direct unsecured obligations and rank equally with all of our unsecured indebtedness from time to time outstanding. Each series of notes will be issued by a separate trust. These notes bear interest at fixed interest rates and offer a variety of maturities no less than twelve months from the original date of issuance.
During the nine months ended March 31, 2022, we issued $155,909 aggregate principal amount of Prospect Capital InterNotes® for net proceeds of $152,441. These notes were issued with stated interest rates ranging from 2.25% to 4.63% with a weighted average interest rate of 3.48%. These notes mature between February 15, 2025 and March 15, 2052.
The following table summarizes the Prospect Capital InterNotes® issued during the nine months ended March 31, 2022:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
1,499
2.50%
2.50%
February 15, 2025 – March 15, 2025
5
58,068
2.25% – 4.50%
3.26%
July 15, 2026 – March 15, 2027
7
20,929
2.75% – 4.25%
3.02%
July 15, 2028 – February 15, 2029
10
22,435
3.15% – 4.50%
3.38%
July 15, 2031 – March 15, 2032
12
2,422
3.70%
3.70%
July 15, 2033
15
15,041
3.50% – 4.50%
3.84%
July 15, 2036 – February 15, 2037
30
35,515
4.00% – 4.63%
4.06%
July 15, 2051 – March 15, 2052
$
155,909
During the nine months ended March 31, 2021, we issued $109,562 aggregate principal amount of our Prospect Capital InterNotes® for net proceeds of $107,830. These notes were issued with stated interest rates ranging from 1.50% to 6.00% with a weighted average interest rate of 4.70%. These notes mature between Janaury 15, 2024 and April 15, 2031.
The following table summarizes the Prospect Capital InterNotes® issued during the nine months ended March 31, 2021:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
662
1.50
%
1.50%
January 15, 2024
5
62,567
3.00% – 5.50%
4.60%
July 15, 2025 – April 15, 2026
7
16,921
3.25% – 5.75%
4.84%
July 15, 2027 – April 15, 2028
10
29,412
3.50% – 6.00%
4.90%
July 15, 2030 – April 15, 2031
$
109,562
During the nine months ended March 31, 2022, we repaid $1,223 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. In order to replace short maturity debt with longer-term debt, we redeemed $322,623 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 5.45%. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the nine months ended March 31, 2022 was $6,403.
134
The following table summarizes the Prospect Capital InterNotes® outstanding as of March 31, 2022:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
2,161
1.50% – 2.50%
2.19%
January 15, 2024 – March 15, 2025
5
88,361
2.25% – 4.50%
3.17%
January 15, 2026 – March 15, 2027
6
15,107
3.00%
3.00%
June 15, 2027 – July 15, 2027
7
29,252
2.75% – 4.25%
3.17%
January 15, 2028 – February 15, 2029
8
3,511
3.40% – 3.50%
3.45%
June 15, 2029 – July 15, 2029
10
77,185
3.15% – 4.50%
3.85%
August 15, 2029 – March 15, 2032
12
15,066
3.70% – 4.00%
3.95%
June 15, 2033 – July 15, 2033
15
15,041
3.50% – 4.50%
3.84%
July 15, 2036 – February 15, 2037
18
3,085
4.50% – 5.00%
4.73%
January 15, 2031 – April 15, 2031
20
1,597
5.75%
5.75%
November 15, 2032
25
8,036
6.25% – 6.50%
6.37%
November 15, 2038 – May 15, 2039
30
82,372
4.00% – 6.63%
5.29%
November 15, 2042 – March 15, 2052
$
340,774
During the nine months ended March 31, 2021, we repaid $4,022 aggregate principal amount of Prospect Capital InterNotes® at par in accordance with the Survivor’s Option, as defined in the InterNotes® Offering prospectus. In order to replace short maturity debt with longer-term debt, we redeemed $112,489 aggregate principal amount of Prospect Capital InterNotes® at par with a weighted average interest rate of 5.45%. As a result of these transactions, we recorded a loss in the amount of the unamortized debt issuance costs. The net loss on the extinguishment of Prospect Capital InterNotes® in the nine months ended March 31, 2021 was $1,100.
The following table summarizes the Prospect Capital InterNotes® outstanding as of June 30, 2021:
Tenor at Origination (in years)
Principal Amount
Interest Rate Range
Weighted Average Interest Rate
Maturity Date Range
3
$
662
1.50%
1.50%
January 15, 2024
5
46,968
3.00% – 4.25%
3.28%
August 15, 2024 – May 15, 2026
6
15,107
3.00%
3.00%
June 15, 2027 – July 15, 2027
7
59,729
3.25% – 5.75%
4.31%
July 15, 2024 – May 15, 2028
8
3,511
3.40% – 3.50%
3.45%
June 15, 2029 – July 15, 2029
10
201,285
3.50% – 6.25%
5.09%
January 15, 2024 – July 15, 2031
12
14,432
4.00% – 6.00%
4.25%
November 15, 2025 – July 15, 2033
15
16,801
5.75% – 6.00%
5.79%
May 15, 2028 – November 15, 2028
18
18,487
4.50% – 6.25%
5.59%
December 15, 2030 – August 15, 2031
20
3,777
5.75% – 6.00%
5.89%
November 15, 2032 – October 15, 2033
25
30,344
6.25% – 6.50%
6.39%
August 15, 2038 – May 15, 2039
30
97,608
5.50% – 6.75%
6.25%
November 15, 2042 – October 15, 2043
$
508,711
In connection with the issuance of Prospect Capital InterNotes®, we incurred $25,485 of fees which are being amortized over the term of the notes, of which $7,196 remains to be amortized and is included as a reduction within Prospect Capital InterNotes® on the Consolidated Statement of Assets and Liabilities as of March 31, 2022.
During the three months ended March 31, 2022 and March 31, 2021, we recorded $3,652 and $10,515, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense. During the nine months ended March 31, 2022 and March 31, 2021, we recorded $13,130 and $30,431, respectively, of interest costs and amortization of financing costs on the Prospect Capital InterNotes® as interest expense.
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Net Asset Value Applicable to Common Stockholders
During the nine months ended March 31, 2022, our net asset value applicable to common shares increased by $427,534 or $1.00 per common share. The increase was primarily attributable to an increase in net realized and net change in unrealized gains of $376,109, or $0.96 per basic weighted average common share. During the nine months ended March 31, 2022, net investment income of $253,931, or $0.65 per basic weighted average common share, also exceeded distributions to common and preferred stockholders of $227,470 (including distributions classified as return of capital distributions to common stockholders), or $0.58 per basic weighted average common share, resulting in a net increase of $0.07 per basic weighted average common share. The increase was primarily offset by $0.03 of dilution per common share related to common stock issuances through our dividend reinvestment program for the nine months ended March 31, 2022. The following table shows the calculation of net asset value per common share as of March 31, 2022 and June 30, 2021.
March 31, 2022
June 30, 2021
Net assets
$
4,236,011
$
3,945,517
Less: Preferred Stock
—
(137,040)
Net assets available to common stockholders
$
4,236,011
$
3,808,477
Shares of common stock issued and outstanding
391,718,136
388,419,573
Net asset value per common share
$
10.81
$
9.81
Results of Operations
Operating results for the three and nine months ended March 31, 2022 and March 31, 2021 were as follows:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Investment income
$
181,431
$
159,456
$
526,281
$
474,628
Operating expenses
94,426
86,054
272,350
262,120
Net investment income
87,005
73,402
253,931
212,508
Net realized (losses) gains from investments
(2,254)
881
(12,082)
7,451
Net change in unrealized gains from investments
80,486
184,960
398,340
518,577
Net realized losses on extinguishment of debt
(941)
(12,835)
(10,149)
(18,415)
Net increase in net assets resulting from operations
164,296
246,408
630,040
720,121
Preferred stock dividend
7,139
400
16,748
446
Net Increase in Net Assets Resulting from Operations applicable to Common Stockholders
$
157,157
$
246,008
$
613,292
$
719,675
While we seek to maximize gains and minimize losses, our investments in portfolio companies can expose our capital to risks greater than those we may anticipate. These companies typically do not issue securities rated investment grade, and have limited resources, limited operating history, and concentrated product lines or customers. These are generally private companies with limited operating information available and are likely to depend on a small core of management talents. Changes in any of these factors can have a significant impact on the value of the portfolio company. These changes, along with those discussed in Investment Valuation above, can cause significant fluctuations in our net change in unrealized gains (losses) from investments, and therefore our net increase (decrease) in net assets resulting from operations applicable to common stockholders, quarter over quarter.
136
Investment Income
We generate revenue in the form of interest income on the debt securities that we own, dividend income on any common or preferred stock that we own, and fees generated from the structuring of new deals. Our investments, if in the form of debt securities, will typically have a term of one to ten years and bear interest at a fixed or floating rate. To the extent achievable, we will seek to collateralize our investments by obtaining security interests in our portfolio companies’ assets. We also may acquire minority or majority equity interests in our portfolio companies, which may pay cash or in-kind dividends on a recurring or otherwise negotiated basis. In addition, we may generate revenue in other forms including prepayment penalties and possibly consulting fees. Any such fees generated in connection with our investments are recognized as earned.
Investment income consists of interest income, including accretion of loan origination fees and prepayment penalty fees, dividend income and other income, including settlement of net profits interests, overriding royalty interests and structuring fees.
The following table describes the various components of investment income and the related levels of debt investments:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Interest income
$
142,489
$
139,583
$
430,933
$
416,609
Dividend income
5,306
1,402
12,277
3,707
Other income
33,636
18,471
83,071
54,312
Total investment income
$
181,431
$
159,456
$
526,281
$
474,628
Average debt principal of performing interest bearing investments(1)
$
6,371,203
$
5,483,233
$
6,052,339
$
5,432,414
Weighted average interest rate earned on performing interest bearing investments(1)
8.95
%
10.18
%
9.35
%
10.08
%
Average debt principal of all interest bearing investments(2)
$
6,658,993
$
5,800,685
$
6,335,575
$
5,793,085
Weighted average interest rate earned on all interest bearing investments(2)
8.56
%
9.63
%
8.94
%
9.45
%
(1) Excludes equity investments and non-accrual loans.
(2) Excludes equity investments.
The average interest earned on interest bearing performing assets decreased from 10.18% for the three months ended March 31, 2021 to 8.95% for the three months ended March 31, 2022. The average interest earned on all interest bearing assets decreased from 9.63% for the three months ended March 31, 2021 to 8.56% for the three months ended March 31, 2022. The decrease is primarily due to reduced returns from our structured credit investments.
The average interest earned on interest bearing performing assets decreased from 10.08% for the nine months ended March 31, 2021 to 9.35% for the nine months ended March 31, 2022. The average interest earned on all interest bearing assets decreased from 9.45% for the nine months ended March 31, 2021 to 8.94% for the nine months ended March 31, 2022. The decrease is primarily due to reduced returns from our structured credit investments.
Investment income is also generated from dividends and other income which is less predictable than interest income. The following table describes dividend income earned for the three and nine months ended March 31, 2022 and March 31, 2021, respectively:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Dividend income
NMMB, Inc.
$
3,988
$
—
$
7,034
$
—
Valley Electric Company, Inc.
809
—
2,509
2,261
Nationwide Loan Company LLC
400
1,384
2,150
1,384
R-V Industries, Inc.
—
—
441
—
Other, net
109
18
143
62
Total dividend income
$
5,306
$
1,402
$
12,277
$
3,707
137
Other income is comprised of structuring fees, advisory fees, amendment fees, royalty interests, settlement of net profits interests, settlement of residual profits interests, administrative agent fees and other miscellaneous and sundry cash receipts. The following table describes other income earned for the three and nine months ended March 31, 2022 and March 31, 2021, respectively:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Structuring, advisory and amendment fees
Belnick, LLC
$
1,750
$
—
$
1,750
$
—
National Property REIT Corp.
1,593
904
2,815
2,337
Global Tel*Link Corporation
1,500
—
1,500
—
SEOTownCenter, Inc.
1,040
—
1,040
—
USG Intermediate, LLC
687
—
687
—
Magnate Worldwide, LLC
666
—
3,516
—
First Tower Finance Company LLC
664
5,443
7,898
15,443
PeopleConnect Intermediate, LLC
—
—
2,495
—
Broder
—
—
2,239
—
DRI Holding Inc.
—
—
2,238
—
BCPE Osprey Buyer, Inc.
—
—
1,812
—
BCPE North Star US Holdco 2, Inc.
—
—
1,463
—
Victor Technology, LLC
—
—
600
—
Medical Solutions Holdings, Inc.
—
—
530
—
PGX Holdings, Inc.
—
—
3,779
—
Ahead Data Blue, LLC
—
—
—
1,725
Interventional Management Services, LLC
—
1,510
—
1,510
Orva Buyer, LLC
—
—
—
810
Thermal Product Solutions, Inc.
—
—
—
689
H.I.G. KM2 Investor, LLC
—
—
—
500
Atlantis Health Care Group (Puerto Rico), Inc.
—
—
—
445
Eze Castle Integration, Inc.
—
—
—
1,250
OneTouchPoint Corp.
—
810
—
810
Other, net
2,249
208
4,601
774
Total structuring, advisory and amendment fees
$
10,149
$
8,875
$
38,963
$
26,293
Royalty and net revenue interests
National Property REIT Corp.
$
23,112
$
9,297
$
43,052
$
27,134
Other, net
173
167
527
504
Total royalty and net revenue interests
$
23,285
$
9,464
$
43,579
$
27,638
Administrative agent fees
Other, net
$
202
$
132
$
529
$
381
Total administrative agent fees
$
202
$
132
$
529
$
381
Total other income
$
33,636
$
18,471
$
83,071
$
54,312
Operating Expenses
Our primary operating expenses consist of investment advisory fees (base management and income incentive fees), borrowing costs, legal and professional fees, overhead-related expenses and other operating expenses. These expenses include our allocable portion of overhead under the Administration Agreement with Prospect Administration under which Prospect Administration provides administrative services and facilities for us. Our investment advisory fees compensate the Investment Adviser for its work in identifying, evaluating, negotiating, closing and monitoring our investments. We bear all other costs and expenses of our operations and transactions.
138
The following table describes the various components of our operating expenses:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Base management fee
$
36,426
$
29,183
$
102,472
$
83,866
Income incentive fee
19,967
18,251
59,296
53,354
Interest and credit facility expenses
29,235
32,773
86,952
100,549
Allocation of overhead from Prospect Administration
4,126
2,685
10,891
10,768
Audit, compliance and tax related fees
994
989
1,940
2,267
Directors’ fees
131
113
360
339
Other general and administrative expenses
3,547
2,060
10,439
10,977
Total operating expenses
$
94,426
$
86,054
$
272,350
$
262,120
Total gross and net base management fee was $36,426 and $29,183 for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase in total gross base management fee is directly related to a increase in average total assets.
Total gross base management fee was $102,472 and $83,866 for the nine months ended March 31, 2022 and March 31, 2021, respectively. The increase in total gross base management fee is directly related to a increase in average total assets.
For the three months ended March 31, 2022 and March 31, 2021, we incurred $19,967 and $18,251 of income incentive fees, respectively. This increase was driven by a corresponding increase in pre-incentive fee net investment income (net of preferred stock dividends) from $91,253 for the three months ended March 31, 2021 to $99,833 for the three months ended March 31, 2022. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement. Income incentive fee for the nine months ended March 31, 2021 includes a $264 adjustment for fees earned in prior periods that were neither expensed nor paid to the Investment Adviser.
For the nine months ended March 31, 2022 and March 31, 2021, we incurred $59,296 and $53,354 of income incentive fees, respectively. This increase was driven by a corresponding increase in pre-incentive fee net investment income (net of preferred stock dividends) from $265,416 for the nine months ended March 31, 2021 to $296,479 for the nine months ended March 31, 2022. No capital gains incentive fee has yet been incurred pursuant to the Investment Advisory Agreement.
During the three months ended March 31, 2022 and March 31, 2021, we incurred $29,235 and $32,773 respectively, of interest and credit facility expenses related to our Revolving Credit Facility, Convertible Notes, Public Notes and Prospect Capital InterNotes® (collectively, our “Notes”). During the nine months ended March 31, 2022 and March 31, 2021, we incurred $86,952 and $100,549, respectively, of interest expenses related to our Notes. These expenses are related directly to the leveraging capacity put into place for each of those periods and the levels of indebtedness actually undertaken in those periods.
The table below describes the various expenses of our Notes and the related indicators of leveraging capacity and indebtedness during these years:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Interest on borrowings
$
25,131
$
28,849
$
74,668
$
88,709
Amortization of deferred financing costs
2,137
1,756
6,242
5,526
Accretion of discount on unsecured debt
744
365
2,063
903
Facility commitment fees
1,223
1,803
3,979
5,411
Total interest and credit facility expenses
$
29,235
$
32,773
$
86,952
$
100,549
Average principal debt outstanding
$
2,657,523
$
2,395,361
$
2,469,905
$
2,334,905
Annualized weighted average stated interest rate on borrowings(1)
3.78
%
4.82
%
4.03
%
5.07
%
Annualized weighted average interest rate on borrowings(2)
4.40
%
5.47
%
4.69
%
5.74
%
(1)Includes only the stated interest expense.
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(2)Includes the stated interest expense, amortization of deferred financing costs, accretion of discount on Public Notes and commitment fees on the undrawn portion of our Revolving Credit Facility.
Interest expense decreased from $28,849 for the three months ended March 31, 2021 to $25,131 for the three months ended March 31, 2022. The weighted average stated interest rate on borrowings (excluding amortization, accretion and undrawn facility fees) decreased from 4.82% for the three months ended March 31, 2021 to 3.78% for the three months ended March 31, 2022, primarily due to redemptions of our Prospect Capital InterNotes®, increased utilization of our Revolving Credit Facility, and repurchases of our Convertible Notes, June 2024 Baby Bond, June 2028 Baby Bond and June 2029 Baby Bond. In addition to Prospect Capital InterNotes®, the 2026 Notes, 3.364% 2026 Notes, and the 2028 Bond were issued at lower rates.
Interest expense decreased from $88,709 for the nine months ended March 31, 2021 to $74,668 for the nine months ended March 31, 2022. The weighted average stated interest rate on borrowings (excluding amortization, accretion and undrawn facility fees) decreased from 5.07% for the nine months ended March 31, 2021 to 4.03% for the nine months ended March 31, 2022. This decrease is primarily due to redemptions of our Prospect Capital InterNotes®, increased utilization of our Revolving Credit Facility, and repurchases of our Convertible Notes, June 2024 Baby Bond, June 2028 Baby Bond and June 2029 Baby Bond. In addition to Prospect Capital InterNotes®, the 2026 Notes and 3.364% 2026 Notes, and the 2028 Bond were issued at lower rates.
The allocation of net overhead expense from Prospect Administration was $4,126 and $2,685 for the three months ended March 31, 2022 and March 31, 2021, respectively. In addition, during the three months ended March 31, 2021, we were given a credit in the amount of $3,522 for legal expenses incurred on behalf of our portfolio companies that were subsequently remitted to Prospect Administration in the subsequent quarter.
The allocation of net overhead expense from Prospect Administration was $10,891 and $10,768 for the nine months ended March 31, 2022 and March 31, 2021, respectively. Prospect Administration received estimated payments of $5,391 and $1,038 directly from our portfolio companies, and certain funds managed by the Investment Adviser for legal services during the nine months ended March 31, 2022 and March 31, 2021, respectively. In addition, during the nine months ended March 31, 2021, we were given a credit in the amount of $3,522 for legal expenses incurred on behalf of our portfolio companies that were subsequently remitted to Prospect Administration in the subsequent quarter. We were given a credit for these payments as a reduction of the administrative services cost payable by us to Prospect Administration. Had Prospect Administration not received these payments, Prospect Administration’s charges for its administrative services would have increased by this amount. We were given no such credit during the nine months ended March 31, 2022.
Total operating expenses, excluding investment advisory fees, interest and credit facility expenses, and allocation of overhead from Prospect Administration (“Other Operating Expenses”), net of any expense reimbursements, were $4,672 and $3,162 for the three months ended March 31, 2022 and March 31, 2021, respectively. The increase was primarily attributable to a increase in legal fees offset by a decrease in general and administrative expenses.
Total operating expenses, excluding investment advisory fees, interest and credit facility expenses, and allocation of overhead from Prospect Administration (“Other Operating Expenses”), net of any expense reimbursements, were $12,739 and $13,583 for the nine months ended March 31, 2022 and March 31, 2021, respectively. The decrease was primarily attributable to a decrease in general and administrative expenses.
Net Realized Gains (Losses)
The following table details net realized gains (losses) from investments for the three months ended March 31, 2022 and March 31, 2021:
Three Months Ended March 31,
Portfolio Company
2022
2021
Edmentum Ultimate Holdings, LLC
$
—
$
745
Sudbury Mill CLO, Ltd.
516
—
Brookside Mill CLO
(7,683)
—
Dunn Paper, Inc.
(385)
NMMB Inc.
5,294
—
Other, net
4
136
Net realized (losses) gains
$
(2,254)
$
881
140
The following table details net realized gains (losses) from investments for the nine months ended March 31, 2022 and March 31, 2021:
Nine Months Ended March 31,
Portfolio Company
2022
2021
Edmentum Ultimate Holdings, LLC
$
—
$
4,469
Spartan - Term Loan B
—
2,832
Brookside Mill CLO
(7,683)
—
Sudbury Mill CLO, Ltd.
(8,890)
—
Dunn Paper, Inc.
(385)
—
NMMB Inc.
5,294
—
Other, net
(418)
150
Net realized (losses) gains
$
(12,082)
$
7,451
Net Realized Loss from Extinguishment of Debt
During the three months ended March 31, 2022 and March 31, 2021, we recorded a net realized loss from the extinguishment of debt of $941 and $12,835, respectively. During the nine months ended March 31, 2022 and March 31, 2021, we recorded a net realized loss from the extinguishment of debt of $10,149 and $18,415, respectively. Refer to Capitalization for additional discussion.
Change in Unrealized Gains (Losses)
The following table details net change in unrealized (losses) gains for our portfolio for the three and nine months ended March 31, 2022 and March 31, 2021, respectively:
Three Months Ended March 31,
Nine Months Ended March 31,
2022
2021
2022
2021
Control investments
$
96,162
$
142,379
$
352,558
$
323,967
Affiliate investments
(11,610)
21,876
26,016
107,582
Non-control/non-affiliate investments
(4,066)
20,705
19,766
87,028
Net change in unrealized gains (losses)
$
80,486
$
184,960
$
398,340
$
518,577
The following table details reflects net change in unrealized gains (losses) on investments for the three months ended March 31, 2022:
Net Change in Unrealized Gains (Losses)
National Property REIT Corp.
$
149,967
CP Energy Services Inc.
31,164
Subordinated Structured Notes
18,874
Other, net
4,367
Curo Group Holdings Corp.
(6,254)
Credit Central Loan Company, LLC
(6,531)
K&N Parent, Inc.
(8,110)
Pacific World Corporation
(9,258)
NMMB, Inc.
(10,540)
PGX Holdings, Inc.
(12,636)
Echelon Transportation, LLC
(17,588)
InterDent, Inc.
(52,969)
Net change in unrealized gains
$
80,486
141
The following table reflects net change in unrealized gains (losses) on investments for the three months ended March 31, 2021:
Net Change in Unrealized Gains (Losses)
InterDent, Inc.
$
54,955
First Tower Finance Company LLC
47,983
National Property REIT Corp.
36,628
PGX Holdings, Inc.
19,457
Other, net
16,853
Subordinated Structured Notes
11,527
CP Energy Services Inc.
5,306
NMMB, Inc.
5,161
Credit Central Loan Company, LLC
(6,091)
Echelon Transportation, LLC
(6,819)
Net change in unrealized gains
$
184,960
The following table details net change in unrealized gains (losses) on investments for the nine months ended March 31, 2022:
Net Change in Unrealized Gains (Losses)
National Property REIT Corp.
$
348,536
Subordinated Structured Notes
46,619
CP Energy Services Inc.
32,471
First Tower Finance Company LLC
29,024
NMMB, Inc.
21,363
PGX Holdings, Inc.
14,189
Targus Cayman HoldCo Limited
10,331
MITY, Inc.
6,432
R-V Industries, Inc.
4,062
Other, net
(5,257)
USES Corp.
(7,899)
K&N Parent, Inc.
(8,189)
Curo Group Holdings Corp.
(8,565)
Pacific World Corporation
(24,173)
Echelon Transportation, LLC
(26,927)
InterDent, Inc.
(33,677)
Net change in unrealized gains
$
398,340
142
The following table details net change in unrealized gains (losses) on investments for the nine months ended March 31, 2021:
Net Change in Unrealized Gains (Losses)
InterDent, Inc.
$
121,247
PGX Holdings, Inc.
107,828
National Property REIT Corp.
107,149
First Tower Finance Company LLC
75,057
Subordinated Structured Notes
36,791
Other, net
36,303
USES Corp.
18,076
Valley Electric Company, Inc.
15,350
R-V Industries, Inc.
9,798
Pacific World Corporation
9,634
NMMB, Inc.
9,101
Securus Technologies Holdings, Inc.
6,935
ACE Cash Express, Inc.
5,348
Targus Cayman HoldCo Limited
5,225
Engine Group, Inc.
4,452
Edmentum Ultimate Holdings, LLC
(5,471)
MITY, Inc.
(8,702)
Credit Central Loan Company, LLC
(10,145)
Echelon Transportation, LLC
(12,456)
CP Energy Services, Inc.
(12,943)
Net change in unrealized gains
$
518,577
Financial Condition, Liquidity and Capital Resources
On July 27, 2017, the Financial Conduct Authority (“FCA”) announced that it will no longer persuade or compel banks to submit rates for the calculation of the LIBOR rates after 2021 (the “FCA Announcement”). Furthermore, in the United States, efforts to identify a set of alternative U.S. dollar reference interest rates include proposals by the Alternative Reference Rates Committee of the Federal Reserve Board (“ARRC”) and the Federal Reserve Bank of New York. On August 24, 2017, the Federal Reserve Board requested public comment on a proposal by the Federal Reserve Bank of New York, in cooperation with the Office of Financial Research, to produce three new reference rates intended to serve as alternatives to LIBOR. These alternative rates are based on overnight repurchase agreement transactions secured by U.S. Treasury Securities. On December 12, 2017, following consideration of public comments, the Federal Reserve Board concluded that the public would benefit if the Federal Reserve Bank of New York published the three proposed reference rates as alternatives to LIBOR (the “Federal Reserve Board Notice”). In April 2018, the Federal Reserve System, in conjunction with the ARRC, announced the replacement of LIBOR with a new index, calculated by short term repurchase agreements collateralized by U.S. Treasury securities, called the Secured Overnight Financing Rate (“SOFR”). On June 12, 2019, the Staff from the SEC’s Division of Corporate Finance, Division of Investment Management, Division of Trading and Markets, and Office of the Chief Accountant issued a statement about the potentially significant effects on financial markets and market participants when LIBOR is discontinued in 2021 and no longer available as a reference benchmark rate. The Staff encouraged all market participants to identify contracts that reference LIBOR and begin transitions to alternative rates. Although SOFR appears to be the preferred replacement rate for U.S. dollar LIBOR, at this time, it is not possible to predict the effect of any such changes, any establishment of alternative reference rates or other reforms to LIBOR that may be enacted in the United States, United Kingdom or elsewhere or, whether the COVID-19 will have further effect on LIBOR transition plans. The elimination of LIBOR or any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due
143
to us or on our overall financial condition or results of operations.
At this time, it is not possible to predict the effect of the FCA Announcement or other regulatory changes or announcements, any establishment of any alternative reference rates, including SOFR and its market acceptance, or any other reforms to LIBOR that may be enacted in the United Kingdom, the United States or elsewhere. As such, the potential effect of any such event on our net investment income cannot yet be determined. The CLOs in which the Company is invested generally contemplate a scenario where LIBOR is no longer available by requiring the CLO administrator to calculate a replacement rate primarily through dealer polling on the applicable measurement date. However, there is uncertainty regarding the effectiveness of the dealer polling processes, including the willingness of banks to provide such quotations, which could adversely impact our net investment income. Recently, the CLOs we are invested in have included, or have been amended to include, language permitting the CLO investment manager to implement a market replacement rate (like SOFR) upon the occurrence of certain material disruption events. However, we cannot ensure that all CLOs in which we are invested will have such provisions, nor can we ensure the CLO investment managers will undertake the suggested amendments when able. In addition, the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear, even if certain statutory regimes may apply, e.g., N.Y. Gen. Oblig. Law § 18-401 or the Adjustable Interest Rate (LIBOR) Act. To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans, the CLO would experience an interest rate mismatch between its assets and liabilities which could have an adverse impact on the Company’s net investment income and portfolio returns.
For the nine months ended March 31, 2022 and March 31, 2021, our operating activities used $589,727 and provided $131,003 of cash, respectively. The change in our operating activities is primarily driven by an increase in net originations for the nine months ended March 31, 2022. There were no investing activities for the nine months ended March 31, 2022 and March 31, 2021. Financing activities provided $562,519 and used $74,575 of cash during the nine months ended March 31, 2022 and March 31, 2021, respectively, which included dividend payments of $199,697 and $132,671, respectively. The change in our financing activities is primarily driven by an increase in proceeds from issuance of preferred stock used to finance our increase in net originations for the nine months ended March 31, 2022.
Our primary uses of funds have been to continue to invest in portfolio companies, through both debt and equity investments, repay outstanding borrowings and to make cash distributions to our stockholders.
Our primary sources of funds have historically been issuances of debt and equity. We have and may continue to fund a portion of our cash needs through repayments and opportunistic sales of our existing investment portfolio. We may also securitize a portion of our investments in unsecured or senior secured loans or other assets. Our objective is to put in place such borrowings in order to enable us to expand our portfolio. During the nine months ended March 31, 2022, we borrowed $1,627,051 and we made repayments totaling $1,284,548 under the Revolving Credit Facility. As of March 31, 2022, our outstanding balance on the Revolving Credit Facility was $699,440. As of March 31, 2022, we had, net of unamortized discount and debt issuance costs, $213,875 outstanding on the Convertible Notes, $1,341,858 outstanding on the Public Notes and $333,578 outstanding on the Prospect Capital InterNotes® (See “Capitalization” above).
Undrawn committed revolvers and delayed draw term loans to our portfolio companies incur commitment and unused fees ranging from 0.00% to 7.25%. As of March 31, 2022 and June 30, 2021, we had $43,351 and $67,385, respectively, of undrawn revolver and delayed draw term loan commitments to our portfolio companies. The fair value of our undrawn committed revolvers and delayed draw term loans was zero as of March 31, 2022 and June 30, 2021.
We have guaranteed $2,737 in standby letters of credit issued through a financial intermediary and $1,835 of equipment lease obligations on behalf of InterDent, Inc. (“InterDent”) as of March 31, 2022. Under these arrangements, we would be required to make payments to the financial intermediary or equipment lease provider, respectively, if InterDent was to default on their related payment obligations. As of March 31, 2022, we have not recorded a liability on the statement of assets and liabilities for these guarantees as the likelihood of default on the standby letters of credit or equipment lease is deemed to be remote.
On February 13, 2020, we filed a registration statement on Form N-2 (File No. 333-236415) that was effective upon filing pursuant to Rule 462(e) under the Securities Act as permitted under the Small Business Credit Availability Act. The registration statement permits us to issue, through one or more transactions, an indeterminate amount of securities, consisting of common stock, preferred stock, debt securities, subscription rights to purchase our securities, warrants representing rights to purchase our securities or separately tradeable units combining two or more of our securities.
Preferred Stock
On August 3, 2020, we entered into a Dealer Manager Agreement with Preferred Capital Securities, LLC (“PCS”), pursuant to which PCS has agreed to serve as the Company’s agent, principal distributor and dealer manager for the Company’s offering of
144
up to 40,000,000 shares, par value $0.001 per share, of preferred stock, with a liquidation preference of $25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series A1 Preferred Stock (“Series A1 Preferred Stock”), the 5.50% Series M1 Preferred Stock (“Series M1 Preferred Stock”), and the 5.50% Series M2 Preferred Stock (“Series M2 Preferred Stock”). In connection with such offering, on August 3, 2020, we filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland (“SDAT”), reclassifying and designating 120,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as “Convertible Preferred Stock.” On October 30, 2020, and amended on February 18, 2022, we entered into a Dealer Manager Agreement with InspereX LLC, pursuant to which InspereX LLC has agreed to serve as the Company’s agent and dealer manager for the Company’s offering of up to 10,000,000 shares, par value $0.001 per share, of preferred stock, with a liquidation preference of $25.00 per share. Such preferred stock will initially be issued in multiple series, including the 5.50% Series AA1 Preferred Stock (the “Series AA1 Preferred Stock”) and the 5.50% Series MM1 Preferred Stock (the “Series MM1 Preferred Stock” and together with the Series M1 Preferred Stock and the Series M2 Preferred Stock, the “Series M Preferred Stock”). In connection with such offering, on October 30, 2020 and February 17, 2022, we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 40,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock. On May 19, 2021, we entered into an Underwriting Agreement with UBS Securities LLC, relating to the offer and sale of 187,000 shares, par value $0.001 per share, of 5.50% Series A2 Preferred Stock, with a liquidation preference of $25.00 per share (the “Series A2 Preferred Stock”, and together with the Series A1 Preferred Stock, Series M1 Preferred Stock, Series M2 Preferred Stock, Series AA1 Preferred Stock, and Series MM1 Preferred Stock, the “5.50% Preferred Stock”). The issuance of the Series A2 Preferred Stock settled on May 26, 2021. In connection with such offering, on May 19, 2021, we filed Articles Supplementary with the SDAT, reclassifying and designating an additional 1,000,000 shares of the Company’s authorized and unissued shares of common stock into shares of preferred stock as Convertible Preferred Stock.
In connection with the offerings of the 5.50% Preferred Stock, we adopted and amended, respectively, a preferred stock dividend reinvestment plan (the “Preferred Stock Plan” or the “Preferred Stock DRIP”), pursuant to which holders of the 5.50% Preferred Stock will have dividends on their 5.50% Preferred Stock automatically reinvested in additional shares of such 5.50% Preferred Stock at a price per share of $25.00, if they elect.
Each series of 5.50% Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities.
At any time prior to the listing of the 5.50% Preferred Stock on a national securities exchange, shares of the 5.50% Preferred Stock are convertible, at the option of the holder of the 5.50% Preferred Stock (the “Holder Optional Conversion”). We will settle any Holder Optional Conversion by paying or delivering, as the case may be, (A) any portion of the Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the Settlement Amount, minus (b) any portion of the Settlement Amount that we elect to pay in cash, divided by (2) the arithmetic average of the daily volume weighted average price of shares of our common stock over each of the five consecutive trading days ending on the Holder Conversion Exercise Date (such arithmetic average, the “5-day VWAP”). For the Series A1 Preferred Stock, the Series AA1 Preferred Stock, and the Series A2 Preferred Stock, “Settlement Amount” means (A) $25.00 per share (the “Stated Value”), plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable 5.50% Holder Optional Conversion Fee for the respective Holder Conversion Deadline. For the Series M Preferred Stock, “Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the Holder Conversion Exercise Date, minus (C) the applicable Series M Clawback, if any. “Series M Clawback”, if applicable, means an amount equal to the aggregate amount of all dividends, whether paid or accrued, on such share of Series M Stock in the three full months prior to the Holder Conversion Exercise Date. Subject to certain limited exceptions, we will not pay any portion of the Settlement Amount in cash (other than cash in lieu of fractional shares of our common stock) until the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued. Beginning on the five year anniversary of the date on which a share of 5.50% Preferred Stock is issued, we may elect to settle all or a portion of any Holder Optional Conversion in cash without limitation or restriction. The right of holders to convert a share of 5.50% Preferred Stock will terminate upon the listing of such share on a national securities exchange.
Subject to certain limited exceptions allowing earlier redemption, beginning on the earlier of the five year anniversary of the date on which a share of 5.50% Preferred Stock has been issued, or, for listed shares of 5.50% Preferred Stock, five years from the earliest date on which any series that has been listed was first issued (the earlier of such dates, the “Redemption Eligibility Date”), such share of 5.50% Preferred Stock may be redeemed at any time or from time to time at our option (the “Issuer Optional Redemption”), at a redemption price of 100% of the Stated Value of the shares of 5.50% Preferred Stock to be redeemed plus unpaid dividends accrued to, but not including, the date fixed for redemption.
Subject to certain limitations, each share of 5.50% Preferred Stock may be converted at our option (the “Issuer Optional Conversion”). We will settle any Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the
145
IOC Settlement Amount (as defined below) that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the 5-day VWAP, subject to our ability to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value if the 5-day VWAP represents a discount to our net asset value per share of common stock. For the 5.50% Preferred Stock, “IOC Settlement Amount” means (A) the Stated Value, plus (B) unpaid dividends accrued to, but not including, the date fixed for conversion. In connection with an Issuer Optional Conversion, we will use commercially reasonable efforts to obtain or maintain any stockholder approval that may be required under the 1940 Act to permit us to sell our common stock below net asset value. If we do not have or obtain any required stockholder approval under the 1940 Act to sell our common stock below net asset value and the 5-day VWAP is at a discount to our net asset value per share of common stock, we will settle any conversions in connection with an Issuer Optional Conversion by paying or delivering, as the case may be, (A) any portion of the IOC Settlement Amount that we elect to pay in cash and (B) a number of shares of our common stock at a conversion rate equal to (1) (a) the IOC Settlement Amount, minus (b) any portion of the IOC Settlement Amount that we elect to pay in cash, divided by (2) the NAV per share of common stock at the close of business on the business day immediately preceding the date of conversion. We will not pay any portion of the IOC Settlement Amount from an Issuer Optional Conversion in cash (other than cash in lieu of fractional shares of our common stock) until the Redemption Eligibility Date. Beginning on the Redemption Eligibility Date, we may elect to settle any Issuer Optional Conversion in cash without limitation or restriction. In the event that we exercise an Issuer Optional Conversion with respect to any shares of 5.50% Preferred Stock, the holder of such 5.50% Preferred Stock may instead elect a Holder Optional Conversion with respect to such 5.50% Preferred Stock provided that the date of conversion for such Holder Optional Conversion would occur prior to the date of conversion for an Issuer Optional Conversion.
On July 12, 2021, we entered into an underwriting agreement by and among us, Prospect Capital Management L.P., Prospect Administration LLC, and Morgan Stanley & Co. LLC, RBC Capital Markets, LLC and UBS Securities LLC, as representatives of the underwriters, relating to the offer and sale of 6,000,000 shares, or $150,000 in aggregate liquidation preference, of our 5.35% Series A Fixed Rate Cumulative Perpetual Preferred Stock, par value $0.001 per share (the “Series A Preferred Stock” or “5.35% Preferred Stock”), at a public offering price of $25.00 per share. Pursuant to the Underwriting Agreement, we also granted the underwriters a 30-day option to purchase up to an additional 900,000 shares of Series A Preferred Stock solely to cover over-allotments. The offer settled on July 19, 2021, and no additional shares of Series A Preferred Stock were issued pursuant to the option. In connection with such offering, on July 15, 2021, we filed Articles Supplementary with SDAT, reclassifying and designating 6,900,000 shares of the Company’s authorized and unissued shares of Common Stock into shares of Series A Preferred Stock.
The Series A Preferred Stock ranks (with respect to the payment of dividends and rights upon liquidation, dissolution or winding up) (a) senior to our common stock, (b) on parity with each other series of our preferred stock, and (c) junior to our existing and future secured and unsecured indebtedness. See Note 8, Fair Value and Maturity of Debt Outstanding for further discussion on our senior securities.
Subject to certain limited exceptions allowing earlier redemption, at any time after the close of business on July 19, 2026 (any such date, an “Optional Redemption Date”), at our sole option, we may redeem the Series A Preferred Stock in whole or, from time to time, in part, out of funds legally available for such redemption, at a price per share equal to the liquidation preference of $25.00 per share, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for redemption. We may also redeem the Series A Preferred Stock at any time, in whole or, from time to time, in part, including prior to the Optional Redemption Date, pro rata, based on liquidation preference, with all other series of our then outstanding preferred stock, in the event that our Board determines to redeem any series of our preferred stock, in whole or, from time to time, in part, because such redemption is deemed necessary by the Board to comply with the asset coverage requirements of the 1940 Act or for us to maintain RIC status.
In the event of a Change of Control Triggering Event (as defined below), we may, at our option, exercise our special optional redemption right to redeem the Series A Preferred Stock, in whole or in part, within 120 days after the first date on which such Change of Control Triggering Event has occurred by paying the liquidation preference, plus an amount equal to all unpaid dividends on such shares (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the date fixed for such redemption. To the extent that we exercise our optional redemption right or our special optional redemption right relating to the Series A Preferred Stock, the holders of Series A Preferred Stock will not be permitted to exercise the conversion right described below in respect of their shares called for redemption.
Except to the extent that we have elected to exercise our optional redemption right or our special optional redemption right by providing notice of redemption prior to the Change of Control Conversion Date (as defined below), upon the occurrence of a Change of Control Triggering Event, each holder of Series A Preferred Stock will have the right to convert some or all of the Series A Preferred Stock held by such holder on the Change of Control Conversion Date into a number of our shares of common stock per Series A Preferred Stock to be converted equal to the lesser of:
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•the quotient obtained by dividing (i) the sum of the Liquidation Preference per share plus an amount equal to all unpaid dividends thereon (whether or not earned or declared, but excluding interest thereon) accumulated up to, but excluding, the Change of Control Conversion Date (unless the Change of Control Conversion Date is after a Record Date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividends will be included in this sum) by (ii) the Common Stock Price (as defined below); and
•6.03865, subject to certain adjustments,
subject, in each case, to provisions for the receipt of alternative consideration upon conversion as described in the applicable prospectus supplement.
If we have provided or provide a redemption notice with respect to some or all of the Series A Preferred Stock, holders of any Series A Preferred Stock that we have called for redemption will not be permitted to exercise their Change of Control Conversion Right in respect of any of their Series A Preferred Stock that have been called for redemption, and any Series A Preferred Stock subsequently called for redemption that have been tendered for conversion will be redeemed on the applicable date of redemption instead of converted on the Change of Control Conversion Date.
For purposes of the foregoing discussion of a redemption upon the occurrence of a Change of Control Triggering Event, the following definitions are applicable:
“Change of Control Triggering Event” means the occurrence of any of the following:
•the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation and other than an Excluded Transaction) in one or a series of related transactions, of all or substantially all of the assets of the Company and its Controlled Subsidiaries taken as a whole to any “person” or “group” (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than to any Permitted Holders); provided that, for the avoidance of doubt, a pledge of assets pursuant to any of our secured debt instruments or the secured debt instruments of our Controlled Subsidiaries shall not be deemed to be any such sale, lease, transfer, conveyance or disposition; or
•the consummation of any transaction (including, without limitation, any merger or consolidation and other than an Excluded Transaction) the result of which is that any “person” or “group” (as those terms are used in Section 13(d)(3) of the Exchange Act) (other than any Permitted Holders) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50% of our outstanding Voting Stock, measured by voting power rather than number of shares.
Notwithstanding the foregoing, the consummation of any of the transactions referred to in the bullet points above will not be deemed a Change of Control Triggering Event if we or the acquiring or surviving consolidated entity has or continues to have a class of common securities (or ADRs representing such securities) listed on the NYSE, the NYSE American or NASDAQ, or listed or quoted on an exchange or quotation system that is a successor to the NYSE, the NYSE American or NASDAQ, or is otherwise listed or quoted on a national securities exchange.
The “Change of Control Conversion Date” is the date the shares of Series A Preferred Stock are to be converted, which will be a business day selected by us that is no fewer than 20 days nor more than 35 days after the date on which we provide the notice described above to the holders of Series A Preferred Stock.
The “Common Stock Price” will be (i) if the consideration to be received in the Change of Control Triggering Event by the holders of our common stock is solely cash, the amount of cash consideration per share of our common stock or (ii) if the consideration to be received in the Change of Control Triggering Event by holders of our common stock is other than solely cash (x) the average of the closing sale prices per share of our common stock (or, if no closing sale price is reported, the average of the closing bid and ask prices or, if more than one in either case, the average of the average closing bid and the average closing ask prices) for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event as reported on the principal U.S. securities exchange on which our common stock is then traded, or (y) the average of the last quoted bid prices for our common stock in the over-the-counter market as reported by OTC Markets Group Inc. or similar organization for the ten consecutive trading days immediately preceding, but not including, the effective date of the Change of Control Triggering Event, if our common stock is not then listed for trading on a U.S. securities exchange.
“Controlled Subsidiary” means any of our subsidiaries, 50% or more of the outstanding equity interests of which are owned by us and our direct or indirect subsidiaries and of which we possess, directly or indirectly, the power to direct or cause the direction of the management or policies, whether through the ownership of voting equity interests, by agreement or otherwise.
“Excluded Transaction” means (i) any transaction that does not result in any reclassification, conversion, exchange or cancellation of all or substantially all of the outstanding shares of our Voting Stock; (ii) any changes resulting from a subdivision or combination or a change solely in par value; (iii) any transaction where the shares of our Voting Stock
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outstanding immediately prior to such transaction constitute, or are converted into or exchanged for, a majority of the Voting Stock of the surviving “person” (as that term is used in Section 13(d)(3) of the Exchange Act) or any direct or indirect parent company of the surviving “person” (as that term is used in Section 13(d)(3) of the Exchange Act) immediately after giving effect to such transaction; (iv) any transaction if (A) we become a direct or indirect wholly-owned subsidiary of a holding company and (B)(1) the direct or indirect holders of the Voting Stock of such holding company immediately following that transaction are substantially the same as the holders of our Voting Stock immediately prior to that transaction or (2) immediately following that transaction no “person” (as that term is used in Section 13(d)(3) of the Exchange Act) is the beneficial owner, directly or indirectly, of more than 50% of the Voting Stock of such holding company; or (v) any transaction primarily for the purpose of changing our jurisdiction of incorporation or form of organization.
“Permitted Holders” means (i) us, (ii) one or more of our Controlled Subsidiaries and (iii) Prospect Capital Management or any affiliate of Prospect Capital Management that is organized under the laws of a jurisdiction located in the United States of America and in the business of managing or advising clients.
“Voting Stock” as applied to stock of any person, means shares, interests, participations or other equivalents in the equity interest (however designated) in such person having ordinary voting power for the election of the directors (or the equivalent) of such person, other than shares, interests, participations or other equivalents having such power only by reason of the occurrence of a contingency.
Except as provided above in connection with a Change of Control Triggering Event, the Series A Preferred Stock is not convertible into or exchangeable for any other securities or property.
For so long as the Series A Preferred Stock is outstanding, we will not exercise any option we have to convert any other series of our outstanding preferred stock to common stock, including the Issuer Optional Conversion, or any other security ranking junior to such preferred stock. As a result, and in accordance with ASC 480, we have presented both our 5.50% Preferred Stock and Series A Preferred Stock within temporary equity on our Consolidated Statement of Assets and Liabilities as of March 31, 2022.
We determined the estimated value as of March 31, 2022 of our 5.50% Preferred Stock, with a $25.00 stated value per share. We engaged a third-party valuation service to assist in our determination based on the calculation resulting from the total equity on our Consolidated Statements of Assets and Liabilities in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 (the “Form 10-Q”), which was prepared in accordance with U.S. generally accepted accounting principles in the United States of America, adjusted for the fair value of our investments (i.e. from our Consolidated Schedule of Investments) and total liabilities, divided by the number of shares of our Preferred Stock outstanding. Based on this methodology and because the result from the calculation above is greater than the $25.00 per share stated value of our 5.50% Preferred Stock, the estimated value of our 5.50% Preferred Stock as of March 31, 2022 is $25.00 per share.
Common Stock
Our common stockholders’ equity accounts as of March 31, 2022 and June 30, 2021 reflect cumulative shares issued, net of shares repurchased, as of those respective dates. Our common stock has been issued through public offerings, a registered direct offering, the exercise of over-allotment options on the part of the underwriters, our dividend reinvestment plan and in connection with the acquisition of certain controlled portfolio companies and in connection with our 5.50% Preferred Stock Holder Optional Conversion. When our common stock is issued, the related offering expenses have been charged against paid-in capital in excess of par. All underwriting fees and offering expenses were borne by us.
We did not repurchase any shares of our common stock for the nine months ended March 31, 2022 or March 31, 2021.
Recent Developments
On April 26, 2022, we made a new $18,500 First Lien Term Loan investment and a $75,000 Second Lien Term Loan investment in DTI Holdco, Inc., a technology-enabled e-discovery legal service provider, offering solutions to both corporate and law firm clients. Our investment settled on May 2, 2022.
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On May 9, 2022, we announced the declaration of monthly dividends for our 5.50% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.50% of the Stated Value of $25 per share as set forth in the Articles Supplementary for the Preferred Stock, from the date of issuance or, if later from the most recent dividend payment date, as follows:
Monthly Cash 5.50% Preferred Shareholder Distribution
Record Date
Payment Date
Monthly Amount ($ per share), before pro ration for partial periods
June 2022
6/22/2022
7/1/2022
$0.114583
July 2022
7/20/2022
8/1/2022
$0.114583
August 2022
8/17/2022
9/1/2022
$0.114583
On February 8, 2022, we announced the declaration of quarterly dividends for our 5.35% Preferred Stock for holders of record on the following dates based on an annual rate equal to 5.35% of the Stated Value of $25.00 per share as set forth in the Articles Supplementary for the 5.35% Preferred Stock, from the date of issuance or, if later from the most recent dividend payment date, as follows:
Quarterly Cash 5.35% Preferred Shareholder Distribution
Record Date
Payment Date
Amount ($ per share)
May 2022 - July 2022
7/20/2022
8/1/2022
$0.334375
On May 9, 2022, we announced the declaration of monthly dividends on our common stock as follows:
Monthly Cash Common Shareholder Distribution
Record Date
Payment Date
Amount ($ per share)
May 2022
5/27/2022
6/21/2022
$0.0600
June 2022
6/28/2022
7/20/2022
$0.0600
July 2022
7/27/2022
8/18/2022
$0.0600
August 2022
8/29/2022
9/21/2022
$0.0600
Critical Accounting Policies and Estimates
For discussion of critical accounting policies and estimates, refer to our Annual Report on Form 10-K for the year ended June 30, 2021.
Recent Accounting Pronouncements
For discussion of recent accounting pronouncements, refer to Note 2 within the accompanying notes to the consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are subject to financial market risks, including changes in interest rates and equity price risk. Uncertainty with respect to the economic effects of the COVID-19 outbreak has introduced significant volatility in the financial markets, and the effects of this volatility could materially impact our market risks, including those listed below. For additional information concerning the COVID-19 pandemic and its potential impact on our business and our operating results, see Part I, Item 1A. Risk Factors, “Risks Relating to Our Business - Events outside of our control, including public health crises, may have a negative impact on our portfolio companies and our business and operations” in our Annual Report on Form 10-K.
Interest rate sensitivity refers to the change in our earnings that may result from changes in the level of interest rates impacting some of the loans in our portfolio which have floating interest rates. Additionally, because we fund a portion of our investments with borrowings, our net investment income is affected by the difference between the rate at which we invest and the rate at which we borrow. As a result, there can be no assurance that a significant change in market interest rates will not have a material adverse effect on our net investment income. See Part I, Item 1A. Risk Factors, “Risks Relating to Our Business - Changes in interest rates may affect our cost of capital and net investment income” in our Annual Report on Form 10-K.
Our debt investments may be based on floating rates or fixed rates. For our floating rate loans the rates are determined from the LIBOR, EURO Interbank Offer Rate, the Federal Funds Rate, Secured Overnight Financing Rate (“SOFR”) or the Prime Rate. The floating interest rate loans may be subject to a LIBOR floor. Our loans typically have durations of one, two, three, six or
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twelve months after which they reset to current market interest rates. As of March 31, 2022, 87.20% of the interest earning investments in our portfolio, at fair value, bore interest at floating rates.
We also have a revolving credit facility that is based on floating LIBOR rates. Interest on borrowings under the revolving credit facility is one-month LIBOR plus 205 basis points with no minimum LIBOR floor and an outstanding balance of $699,440 as of March 31, 2022. The Convertible Notes, Public Notes and Prospect Capital InterNotes® bear interest at fixed rates.
On March 5, 2021, the FCA announced that (i) 24 LIBOR settings would cease to exist immediately after December 31, 2021 (all seven euro LIBOR settings; all seven Swiss franc LIBOR settings; the Spot Next, 1-week, 2-month, and 12-month Japanese yen LIBOR settings; the overnight, 1-week, 2-month, and 12-month sterling LIBOR settings; and the 1-week and 2-month US dollar LIBOR settings); (ii) the overnight and 12-month US LIBOR settings would cease to exist after June 30, 2023; and (iii) the FCA would consult on whether the remaining nine LIBOR settings should continue to be published on a synthetic basis for a certain period using the FCA’s proposed new powers that the UK government is legislating to grant to them.
The following table shows the approximate annual impact on net investment income of base rate changes in interest rates (considering interest rate flows for floating rate instruments, excluding our investments in Subordinated Structured Notes) to our loan portfolio and outstanding debt as of March 31, 2022, assuming no changes in our investment and borrowing structure:
(in thousands) Basis Point Change
Interest Income
Interest Expense
Net Investment Income
Net Investment Income (1)
Up 300 basis points
$
103,049
$
20,983
$
82,066
$
65,653
Up 200 basis points
$
60,529
$
13,989
$
46,540
$
37,232
Up 100 basis points
$
25,411
$
6,994
$
18,417
$
14,734
Down 100 basis points
$
(3,047)
$
(3,161)
$
114
$
91
(1)Includes the impact of income incentive fees. See Note 13 in the accompanying Consolidated Financial Statements for more information on income incentive fees.
As of March 31, 2022, one, three, and six month LIBOR were 0.45%, 0.96% and 1.47%, respectively. As of March 31, 2022 the one and three month SOFR were 0.30% and 0.68%, respectively.
We may hedge against interest rate fluctuations by using standard hedging instruments such as futures, options and forward contracts subject to the requirements of the 1940 Act. While hedging activities may insulate us against adverse changes in interest rates, they may also limit our ability to participate in the benefits of higher interest rates with respect to our portfolio of investments. During the year ended March 31, 2022, we did not engage in hedging activities.
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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of March 31, 2022, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the 1934 Act). Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective and provided reasonable assurance that information required to be disclosed in our periodic SEC filings is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. However, in evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of such possible controls and procedures. We are continually monitoring and assessing the COVID-19 pandemic to determine any potential impact on the design and operating effectiveness of our internal control over financial reporting.
Changes in Internal Control Over Financial Reporting
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II
Item 1. Legal Proceedings
(All figures in this item are in thousands except share, per share and other data.)
From time to time, we may become involved in various investigations, claims and legal proceedings that arise in the ordinary course of our business. These matters may relate to intellectual property, employment, tax, regulation, contract or other matters. The resolution of such matters as may arise will be subject to various uncertainties and, even if such claims are without merit, could result in the expenditure of significant financial and managerial resources.
We are not aware of any material legal proceedings as of March 31, 2022.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed below and the risk factors in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2021, which could materially affect our business, financial condition or future results. The risks described in this report and in our Annual Report on Form 10-K are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results. (All figures in this item are in thousands except share, per share and other data.)
Risks Relating to Business
The Russian invasion of Ukraine may have a material adverse impact on us and our portfolio companies.
As a result of Russia's military invasion of Ukraine in February 2022, the United States and other countries imposed broad-reaching political and economic sanctions on Russia, certain Russian allies believed to be providing them military or financial support, on private and public companies domiciled in Russia, including public issuers and banking and financial institutions, and on a variety of individuals. These sanctions, combined with equivalent measures taken by foreign businesses ceasing operations in Russia, continue to adversely impact global financial markets, disrupt global supply chains, and impair the value and liquidity of issuers that continue to maintain exposure to Russia and its allies, Russian investments and sectors that can be impacted by restrictions on Russian imports and exports, such as the oil and gas industry.
It is not possible to predict the duration or extent of longer-term consequences of this conflict, which could include further sanctions, retaliatory measures taken by Russia, embargoes, regional instability, geopolitical shifts and adverse effects on or involving macroeconomic conditions, supply chains, inflation, security conditions, currency exchange rates and financial markets around the globe. However, the consequences of the conflict between Russia and Ukraine could result in an economic downturn or recession either globally or locally in the U.S. or other economies, reduce business activity, spawn additional conflicts (whether in the form of traditional military action, reignited "cold" wars or in the form of virtual warfare such as cyberattacks) with similar and perhaps wider ranging impacts and consequences and have an adverse impact on our returns and net asset value. Such consequences also may increase our funding cost or limit our access to the capital markets.
We are subject to risks related to corporate social responsibility.
Our business faces increasing public scrutiny related to environmental, social and governance (“ESG”) activities. We risk damage to our brand and reputation if we fail to act responsibly in a number of areas, such as environmental stewardship, corporate governance and transparency and considering ESG factors in our investment processes. Adverse incidents with respect to ESG activities could impact the value of our brand, the cost of our operations and relationships with investors, all of which could adversely affect our business and results of operations. Additionally, new regulatory initiatives related to ESG could adversely affect our business.
Inflation can adversely impact our cost of capital and the value of our portfolio investments.
Inflation risk is the risk that the value of assets or income from investments will be worth less in the future as inflation decreases the value of money. Recently, there have been market indicators of a rise in inflation and the Federal Reserve has begun to raise certain benchmark interest rates in an effort to combat inflation. As inflation increases, the real value of our common stock and distributions therefore may decline. In addition, during any periods of rising inflation, the interest rates of debt securities we issue would likely increase, which would tend to further reduce returns to common stockholder; likewise, as interest rates increase, the value of our debt investments would decrease, though this effect can be less pronounced for floating rate instruments. This could also lead to decreased asset coverage for our outstanding debt and preferred stock. Inflation rates
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may change frequently and significantly as a result of various factors, including unexpected shifts in the domestic or global economy and changes in economic policies, and our investments may not keep pace with inflation, which may result in losses to our stockholders. This risk is greater for fixed-income instruments with longer maturities.
Changes relating to the LIBOR calculation process, and the discontinuation of LIBOR, may adversely affect the value of the LIBOR-indexed, floating-rate debt securities in our portfolio or issued by us.
In July 2017, the head of the United Kingdom Financial Conduct Authority announced the desire to phase out the use of LIBOR by the end of 2021. LIBOR can no longer be used to calculate new deals as of December 31, 2021. Since December 31, 2021, all sterling, euro, Swiss franc and Japanese yen LIBOR settings and the 1-week and 2-month U.S. dollar LIBOR settings have ceased to be published or are no longer representative, and after June 30, 2023, the overnight, 1-month, 3-month, 6-month and 12-month U.S. dollar LIBOR settings will cease to be published or will no longer be representative. Various financial industry groups have begun planning for the transition away from LIBOR, but there are challenges to converting certain securities and transactions to a new reference rate. Neither the effect of the LIBOR transition process nor its ultimate success can yet be known.
As an alternative to LIBOR, the FRS, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions recommended replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate (“SOFR”), a new index calculated by short-term repurchase agreements, backed by Treasury securities. Abandonment of, or modifications to, LIBOR could have adverse impacts on newly issued financial instruments and our existing financial instruments which reference LIBOR. While some instruments may contemplate a scenario where LIBOR is no longer available by providing an alternative rate setting methodology, not all instruments may have such provisions and there is significant uncertainty regarding the effectiveness of any such alternative methodologies. On March 15, 2022, President Biden signed into law the Consolidated Appropriations Act of 2022, which among other things, provides for the use of interest rates based on SOFR in certain contracts currently based on LIBOR and a safe harbor from liability for utilizing SOFR-based interest rates as a replacement for LIBOR. Given the inherent differences between LIBOR and SOFR, or any other alternative benchmark rate that may be established, there are many uncertainties regarding a transition from LIBOR, including but not limited to the need to amend all contracts with LIBOR as the referenced rate and how this will impact the cost of variable rate debt and certain derivative financial instruments. In addition, SOFR or other replacement rates may fail to gain market acceptance. Any failure of SOFR or alternative reference rates to gain market acceptance could adversely affect the return on, value of and market for securities linked to such rates. The elimination of LIBOR any other changes or reforms to the determination or supervision of LIBOR could have an adverse impact on the market value of and/or transferability of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us or on our overall financial condition or results of operations.
Neither the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of, new hedges placed against, instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. Moreover, these alternative rate-setting provisions may not be designed for regular use in an environment where LIBOR ceases to be published, and may be an ineffective fallback following the discontinuation of LIBOR.
Recently, the CLOs we are invested in have included, or have been amended to include, language permitting the CLO investment manager to implement a market replacement rate (like SOFR) upon the occurrence of certain material disruption events. However, we cannot ensure that all CLOs in which we are invested will have such provisions, nor can we ensure the CLO investment managers will undertake the suggested amendments when able. We believe that because CLO managers and other CLO market participants have been preparing for an eventual transition away from LIBOR, we do not anticipate such a transition to have a material impact on the liquidity or value of any of our LIBOR-referenced CLO investments. However, because the future of LIBOR at this time is uncertain and the specific effects of a transition away from LIBOR cannot be determined with certainty as of the date of this filing, a transition away from LIBOR could:
• adversely impact the pricing, liquidity, value of, return on and trading for a broad array of financial products, including any LIBOR-linked CLO investments;
• require extensive changes to documentation that governs or references LIBOR or LIBOR-based products, including, for example, pursuant to time-consuming; renegotiations of existing documentation to modify the terms of outstanding investments;
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• result in inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with one or more alternative reference rates;
• result in disputes, litigation or other actions with CLO investment managers, regarding the interpretation and enforceability of provisions in our LIBOR-based CLO investments, such as fallback language or other related provisions, including, in the case of fallbacks to the alternative reference rates, any economic, legal, operational or other impact resulting from the fundamental differences between LIBOR and the various alternative reference rates;
• require the transition and/or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on one or more alternative reference rates, which may prove challenging given the limited history of the proposed alternative reference rates; and
• cause us to incur additional costs in relation to any of the above factors.
In addition, the effect of a phase out of LIBOR on U.S. senior secured loans, the underlying assets of the CLOs in which we invest, is currently unclear, even if certain statutory regimes may apply, e.g., N.Y. Gen. Oblig. Law § 18-401 or the Adjustable Interest Rate (LIBOR) Act. To the extent that any replacement rate utilized for senior secured loans differs from that utilized for a CLO that holds those loans, the CLO would experience an interest rate mismatch between its assets and liabilities which could have an adverse impact on our net investment income and portfolio returns.
Many underlying corporate borrowers can elect to pay interest based on 1-month LIBOR, 3-month LIBOR and/or other rates in respect of the loans held by CLOs in which we are invested, in each case plus an applicable spread, whereas CLOs generally pay interest to holders of the CLO’s debt tranches based on 3-month LIBOR plus a spread. This mismatch in the rate at which CLOs earn interest and the rate at which they pay interest on their debt tranches negatively impacts the cash flows on a CLO’s equity tranche, which may in turn adversely affect our cash flows and results of operations. Unless spreads are adjusted to account for such increases, these negative impacts may worsen.
The senior secured loans underlying the CLOs in which we invest typically have floating interest rates. A rising interest rate environment may increase loan defaults, resulting in losses for the CLOs in which we invest. In addition, increasing interest rates may lead to higher prepayment rates, as corporate borrowers look to avoid escalating interest payments or refinance floating rate loans. Further, a general rise in interest rates will increase the financing costs of the CLOs. However, since many of the senior secured loans within CLOs have LIBOR floors, if LIBOR is below the average LIBOR floor, there may not be corresponding increases in investment income resulting in smaller distributions to equity investors in these CLOs.
The actual effects of the establishment of alternative reference rates or any other reforms to LIBOR or other reference rates (including whether LIBOR will continue to be an acceptable market benchmark) cannot be predicted at this time, and the transition away from LIBOR and other current reference rates to alternative reference rates is complex and could have a material adverse effect on our business, financial condition and results of operations. Factors such as the pace of the transition to replacement or reformed rates, the specific terms and parameters for and market acceptance of any alternative reference rate, prices of and the liquidity of trading markets for products based on alternative reference rates, and our ability to transition and develop appropriate systems and analytics for one or more alternative reference rates could also have a material adverse effect on our business, financial condition and results of operations.
Risks Relating to Our Securities
Senior securities, including debt and preferred equity, expose us to additional risks, including the typical risks associated with leverage and could adversely affect our business, financial condition and results of operations.
We use our revolving credit facility to leverage our portfolio and we expect in the future to borrow from and issue senior debt securities to banks and other lenders and may securitize certain of our portfolio investments. We also have the Unsecured Notes outstanding and have launched a convertible preferred share offering program, which are forms of leverage and are senior in payment rights to our common stock.
Business development companies are generally able to issue senior securities such that their asset coverage, as defined in the 1940 Act, equals at least 200% of gross assets less all liabilities and indebtedness not represented by senior securities, after each issuance of senior securities. In March 2018, the Small Business Credit Availability Act added Section 61(a)(2) to the 1940 Act, a successor provision to Section 61(a)(1) referenced therein, which reduces the asset coverage requirement applicable to business development companies from 200% to 150% so long as the business development company meets certain disclosure requirements and obtains certain approvals. On May 5, 2020, the Company's stockholders voted to approve the application of the reduced asset coverage requirements in Section 61(a) (2) to the Company effective as of May 6, 2020. As a result of the stockholder approval, effective May 6, 2020, the asset coverage ratio under the 1940 Act applicable to the Company decreased to 150% from 200%. In other words, under the 1940 Act, the Company is now able to borrow $2 for investment purposes for every $1 of investor equity, as opposed to borrowing $1 for investment purposes for every $1 of investor equity. As a result, the
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Company will be able to incur additional indebtedness in the future and investors in the Company may face increased investment risk. In addition, the Company’s management fee payable to the Investment Adviser is based on the Company's average adjusted gross assets, which includes leverage and, as a result, if the Company incurs additional leverage, management fees paid to the Investment Adviser would increase.
With certain limited exceptions, as a BDC, we are only allowed to borrow amounts or otherwise issue senior securities such that our asset coverage, as defined in the 1940 Act, is at least 150% after such borrowing or other issuance. The amount of leverage that we employ will depend on the Investment Adviser’s and our Board of Directors’ assessment of market conditions and other factors at the time of any proposed borrowing. There is no assurance that a leveraging strategy will be successful. Leverage involves risks and special considerations for stockholders, any of which could adversely affect our business, financial condition and results of operations, including the following:
•A likelihood of greater volatility in the net asset value and market price of our common stock;
•Diminished operating flexibility as a result of asset coverage or investment portfolio composition requirements required by lenders or investors that are more stringent than those imposed by the 1940 Act;
•The possibility that investments will have to be liquidated at less than full value or at inopportune times to comply with debt covenants or to pay interest or dividends on the leverage;
•Increased operating expenses due to the cost of leverage, including issuance and servicing costs;
•Convertible or exchangeable securities, such as the Convertible Notes outstanding or those issued in the future (including the Preferred Stock (as defined herein)) may have rights, preferences and privileges more favorable than those of our common stock including, the case of the Preferred Stock, the statutory right under the 1940 Act to vote, as a separate class, on the election of two of our directors and approval of certain fundamental transactions in certain circumstances;
•Subordination to lenders’ superior claims on our assets as a result of which lenders will be able to receive proceeds available in the case of our liquidation before any proceeds will be distributed to our stockholders;
•Difficulty meeting our payment and other obligations under the Unsecured Notes and our other outstanding debt or preferred equity;
•The occurrence of an event of default if we fail to comply with the financial and/or other restrictive covenants contained in our debt agreements, including the credit agreement and each indenture governing the Unsecured Notes, which event of default could result in all or some of our debt becoming immediately due and payable;
•Reduced availability of our cash flow to fund investments, acquisitions and other general corporate purposes, and limiting our ability to obtain additional financing for these purposes;
•The risk of increased sensitivity to interest rate increases on our indebtedness with variable interest rates, including borrowings under our amended senior credit facility; and
•Reduced flexibility in planning for, or reacting to, and increasing our vulnerability to, changes in our business, the industry in which we operate and the general economy.
For example, the amount we may borrow under our revolving credit facility is determined, in part, by the fair value of our investments. If the fair value of our investments declines, we may be forced to sell investments at a loss to maintain compliance with our borrowing limits. Other debt facilities we may enter into in the future may contain similar provisions. Any such forced sales would reduce our net asset value and also make it difficult for the net asset value to recover. The Investment Adviser and our Board of Directors in their best judgment nevertheless may determine to use leverage if they expect that the benefits to our stockholders of maintaining the leveraged position will outweigh the risks.
•In addition, our ability to meet our payment and other obligations of the Preferred Stock, the Unsecured Notes and our credit facility depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot provide assurance that our business will generate cash flow from operations, or that future borrowings will be available to us under our existing credit facility or otherwise, in an amount sufficient to enable us to meet our payment obligations under the Preferred Stock, the Unsecured Notes and our other debt and to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt and preferred equity obligations, we may need to refinance or restructure our debt or preferred equity, including the Unsecured Notes, sell assets, reduce or delay capital investments, or seek to raise additional capital. If we are unable to implement one or more of these alternatives, we may not be able to meet our payment obligations under the Preferred Stock, the Unsecured Notes and our other debt.
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Illustration. The following tables illustrate the effect of leverage on returns from an investment in our common stock assuming various annual returns, net of interest expense. The calculations in the tables below are hypothetical and actual returns may be higher or lower than those appearing below.
The below calculation assumes (i) $8.2 billion in total assets, (ii) an average cost of funds of 4.35% (including preferred dividend payments), (iii) $2.6 billion in debt outstanding, (iv) $1.3 billion in liquidation preference of 5.50% Preferred Stock outstanding, (v) $0.2 billion in 5.35% Preferred Stock outstanding, and (vi) $4.2 billion of common stockholders’ equity.
Assumed Return on Our Portfolio (net of expenses)
(10)%
(5)%
0%
5%
10%
Corresponding Return to Common Stockholder(1)
(23.7)%
(13.9)%
(4.1)%
5.6%
15.4%
The below calculation assumes (i) $8.2 billion in total assets, (ii) an average cost of funds of 3.82%, (iii) $2.6 billion in debt outstanding, (iv) $0.2 billion in 5.35% Preferred Stock outstanding, and (v) $5.4 billion of common stockholders’ equity.
Assumed Return on Our Portfolio (net of expenses)
(10)%
(5)%
0%
5%
10%
Corresponding Return to Common Stockholder(2)
(17.2)%
(9.6)%
(2.0%)
5.6%
13.2%
(1) Assumes no conversion of 5.50% Preferred Stock to common stock.
(2) Assumes the conversion of $1.3 billion in 5.50% Preferred Stock at a conversion rate based on the 5-day VWAP of our common stock on March 31, 2022, which was $8.24, and a Holder Optional Conversion Fee (as defined in the prospectus supplement relating to the applicable offering) of 9.00% on Series A1 Preferred Stock and Series AA1 Preferred Stock of the maximum public offering price disclosed within the applicable prospectus supplements. The actual 5-day VWAP of our common stock on a Holder Conversion Exercise Date may be more or less than $8.24, which may result in more or less shares of common stock issued.
The assumed portfolio return is required by regulation of the SEC and is not a prediction of, and does not represent, our projected or actual performance. Actual returns may be greater or less than those appearing in the table.
Pursuant to SEC regulations, this table is calculated as of March 31, 2022. As a result, it has not been updated to take into account any changes in assets or leverage since March 31, 2022.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Our common stock is traded on the NASDAQ Global Select Market under the symbol “PSEC.”
The following table sets forth, for the quarterly reporting periods indicated, the net asset value per common share of our common stock and the high and low sales prices for our common stock, as reported on the NASDAQ Global Select Market. Our common stock historically has traded at prices both above and below its net asset value. There can be no assurance, however, that such premium or discount, as applicable, to net asset value will be maintained. See also “Item 1A. Risk Factors” in Part I of our Annual Report on Form 10-K for the year ended June 30, 2021 for additional information about the risks and uncertainties we face.
Stock Price
Premium (Discount) of High to NAV
Premium (Discount) of Low to NAV
NAV(1)
High(2)
Low(2)
Year Ended June 30, 2020
First quarter
$
8.87
$
6.73
$
6.30
(24.1)
%
(29.0)
%
Second quarter
8.66
6.70
6.37
(22.6)
%
(26.4)
%
Third quarter
7.98
6.61
4.04
(17.2)
%
(49.4)
%
Fourth quarter
8.18
5.74
3.78
(29.8)
%
(53.8)
%
Year Ended June 30, 2021
First quarter
$
8.40
$
5.17
$
4.69
(38.5)
%
(44.2)
%
Second quarter
8.96
5.60
4.95
(37.5)
%
(44.8)
%
Third quarter
9.38
7.98
5.51
(14.9)
%
(41.3)
%
Fourth quarter
9.81
9.22
7.62
(6.0)
%
(22.3)
%
Nine Months Ending March 31, 2022
First quarter
$
10.12
$
8.46
$
7.69
(16.4)
%
(24.0)
%
Second quarter
10.60
9.00
7.83
(15.1)
%
(26.1)
%
Third quarter
10.81
8.89
7.86
(17.8)
%
(27.3)
%
(1) Net asset value per common share is determined as of the last day in the relevant quarter and therefore may not reflect the net asset value per common share on the date of the high or low sales price. The NAVs shown are based on outstanding shares of our common stock at the end of each period.
(2) The High/Low Stock Price is calculated as of the closing price on a given day in the applicable quarter.
Recent Sales of Common Stock Below Net Asset Value
At our 2009, 2010, 2011, 2012 and 2013 annual meeting of stockholders, and at special meetings of stockholders held on June 12, 2020 and June 11, 2021, our stockholders approved our ability to sell shares of our common stock at a price or prices below our NAV per common share at the time of sale in one or more offerings. The current approval to sell shares of our common stock below our NAV per common share is valid until June 11, 2022 and subject to certain conditions as set forth in the proxy statement relating to the special meeting (including that the number of shares sold on any given date does not exceed 25% of our outstanding common stock immediately prior to such sale). Accordingly, we may make offerings of our common stock without any limitation on the total amount of dilution to stockholders. Our prospectus supplement and accompanying prospectus relating to this offering contains additional information about these offerings. Pursuant to the authority granted by our stockholders and the approval of our Board of Directors, we have made the following offerings:
Date of Offering
Price Per Share to Investors
Shares Issued
Estimated Net Asset Value per Common Share(1)
Percentage Dilution
June 15, 2020 to June 22, 2020(2)
$5.29 - $5.40
1,158,222
$7.93 - 7.94
0.10%
(1) The data for sales of common shares below NAV pursuant to our equity distribution agreements are estimates based on our last reported NAV prior to the respective period adjusted for capital events occurring during the period since the last calculated NAV. All amounts presented are approximations based on the best available data at the time of issuance.
(2) At the market offering. Dates of offering represent the sales dates of the stock. The settlement dates are two business days later than the sale dates.
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On March 14, 2022, we filed a notice of meeting and definitive proxy statement in connection with a special meeting of our stockholders that is scheduled to be held on June 10, 2022 for the purpose of asking our stockholders to vote on a proposal to authorize us, with approval of our Board of Directors, to sell shares of our common stock (during the next 12 months) at a price or prices below our then current net asset value per share in one or more offerings subject to certain conditions.
158
FEES AND EXPENSES
The following tables are intended to assist you in understanding the costs and expenses that an investor in shares of common stock will bear directly or indirectly. We caution you that some of the percentages indicated in the table below are estimates and may vary. These tables are based on our assets and common stock outstanding as of March 31, 2022, except that we assume that we have issued $1.3 billion in 5.50% Preferred Stock paying dividends of 5.50% per annum, in addition to our $0.15 billion of 5.35% Preferred Stock paying dividends of 5.35% per annum, and that we have borrowed $1.5 billion under our credit facility, which is the maximum amount available under the credit facility with the current levels of other debt, in addition to our other indebtedness of $1.9 billion. Except where the context suggests otherwise, any reference to fees or expenses paid by “you” or “us” or that “we” will pay fees or expenses, the Company will pay such fees and expenses out of our net assets and, consequently, you will indirectly bear such fees or expenses as an investor in the Company’s common stock. However, you will not be required to deliver any money or otherwise bear personal liability or responsibility for such fees or expenses.
Stockholder transaction expenses:
A1 Shares
M1 and M2 Shares
AA1 Shares and MM1 Shares
Sales Load (as a percentage of offering price)
10.00% (1)
3.00% (2)
5.00% (3)
Offering expenses borne by the Company (as a percentage of offering price)
(4)
(4)
(5)
Preferred Stock Dividend reinvestment plan expenses (6)
None
None
None
Total stockholder transaction expenses (as a percentage of offering price):
11.5%
4.5%
6.0%
Annual expenses (as a percentage of net assets attributable to common stock):
Management fees (7)
4.34%
Incentive fees payable under Investment Advisory Agreement (20% of realized capital gains and 20% of pre-incentive fee net investment income) (8)
1.90%
Total advisory fees
6.24%
Total interest expenses (9)
3.18%
Other expenses (10)
0.76%
Total annual expenses (8)(10)(11)
10.18%
Dividends on Preferred Stock(12)
1.85%
Total annual expenses after dividends on Preferred Stock (13)
12.03%
Example
The following table demonstrates the projected dollar amount of cumulative expenses we would pay out of net assets and that you would indirectly bear over various periods with respect to a hypothetical investment in our common stock. In calculating the following expense amounts, we have assumed we have issued $1.3 billion in 5.50% Preferred Stock paying dividends of 5.50% per annum, in addition to our $0.15 billion of 5.35% Preferred Stock paying dividends of 5.35% per annum, we have borrowed $1.5 billion available under our line of credit, in addition to our other indebtedness of $1.9 billion, and that our annual operating expenses would remain at the levels set forth in the table above and that we would pay the costs shown in the table above.
1 Year
3 Years
5 Years
10 Years
A Shares, AA Shares, and AA1 Shares - You would pay the following expenses on a $1,000 investment in shares of our common stock, assuming a 5% annual return on our portfolio*
$
128
$
306
$
467
$
806
A Shares, AA Shares, and AA1 Shares - You would pay the following expenses on a $1,000 investment in shares of our common stock, assuming a 5% annual return on our portfolio**
$
137
$
331
$
502
$
848
* Assumes that we will not realize any capital gains computed net of all realized capital losses and unrealized capital depreciation on our portfolio.
** Assumes no unrealized capital depreciation or realized capital losses and 5% annual return on our portfolio resulting entirely from net realized capital gains (and therefore subject to the capital gains incentive fee).
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While the example assumes, as required by the SEC, a 5% annual return on our portfolio, our performance will vary and may result in a return greater or less than 5%. The income incentive fee under our Investment Advisory Agreement with Prospect Capital Management is unlikely to be material assuming a 5% annual return on our portfolio and is not included in the example. If we achieve sufficient returns on our portfolio, including through the realization of capital gains, to trigger an incentive fee of a material amount, our distributions to our common stockholders and our expenses would likely be higher. In addition, while the example assumes reinvestment of all dividends and other distributions at NAV, common stockholders that participate in our common stock dividend reinvestment plan will receive a number of shares of our common stock determined by dividing the total dollar amount of the distribution payable to a participant by 95% of the market price per share of our common stock at the close of trading on the valuation date for the distribution.
This example and the expenses in the table above should not be considered a representation of our future expenses. Actual expenses (including the cost of debt, if any, and other expenses) may be greater or less than those shown.
(1) Includes up to a 7.0% selling commission on the $25.00 per share (the “Stated Value”) paid by the Company and a dealer manager fee equal to 3.0% of the Stated Value paid by the Company. Reductions in selling commissions will be reflected in reduced public offering prices as described in the “Plan of Distribution” section of the applicable prospectus supplement and the net proceeds to us will not be impacted by such reductions; therefore, we will bear a reduction in net proceeds to us up to 7.0% of the Stated Value on all A Shares although the selling commission compensation paid by us to our dealer manager may represent less than 7.0% of the Stated Value. We may, through the Holder Optional Conversion Fee, recoup a portion of the Sales Load if stockholders exercise a Holder Optional Conversion (as defined in the prospectus supplement relating to the applicable offering) of their Preferred Stock prior to the 5-year anniversary of the original issue date. The Holder Optional Conversion Fee is 9.00% of the maximum public offering price disclosed herein prior to the first anniversary of the issuance of such Preferred Stock, 8.00% of the maximum public offering price disclosed herein on or after the first anniversary but prior to the second anniversary, 7.00% of the maximum public offering price disclosed herein on or after the second anniversary but prior to the third anniversary, 6.00% of the maximum public offering price disclosed herein on or after the third anniversary but prior to the fourth anniversary, 5.00% of the maximum public offering price disclosed herein on or after the fourth anniversary but prior to the fifth anniversary and 0.00% on or after the fifth anniversary.
(2) Includes a dealer manager fee equal to 3.0% of the Stated Value paid by the Company.
(3) Includes up to a 4.875% selling commission on the $25.00 per share (the “Stated Value”) paid by the Company and a dealer manager fee equal to 0.125% of the Stated Value paid by the Company. For the AA1 Shares we may, through the Holder Optional Conversion Fee, recoup a portion of the Sales Load if stockholders exercise a Holder Optional Conversion (as defined in the prospectus supplement relating to the applicable offering) of their Preferred Stock prior to the 5-year anniversary of the original issue date. The Holder Optional Conversion Fee is 9.00% of the maximum public offering price disclosed herein prior to the first anniversary of the issuance of such Preferred Stock, 8.00% of the maximum public offering price disclosed herein on or after the first anniversary but prior to the second anniversary, 7.00% of the maximum public offering price disclosed herein on or after the second anniversary but prior to the third anniversary, 6.00% of the maximum public offering price disclosed herein on or after the third anniversary but prior to the fourth anniversary, 5.00% of the maximum public offering price disclosed herein on or after the fourth anniversary but prior to the fifth anniversary and 0.00% on or after the fifth anniversary.
(4) The selling commission and dealer manager fee, when combined with organization and offering expenses (including due diligence expenses and fees for establishing servicing arrangements for new stockholder accounts), are not expected to exceed 11.5% of the gross offering proceeds. Our Board of Directors may, in its discretion, authorize the Company to incur underwriting and other offering expenses in excess of 11.5% of the gross offering proceeds. In no event will the combined selling commission, dealer manager fee and offering expenses exceed FINRA’s limit on underwriting and other offering expenses.
(5) The selling commission and dealer manager fee, when combined with organization and offering expenses (including due diligence expenses), are not expected to exceed 6.0% of the gross offering proceeds. Our Board of Directors may, in its discretion, authorize the Company to incur underwriting and other offering expenses in excess of 6.0% of the gross offering proceeds. In no event will the combined selling commission, dealer manager fee and offering expenses exceed FINRA’s limit on underwriting and other offering expenses.
(6) The expenses of the Preferred DRIP are included in “other expenses.” See “Capitalization” in the applicable prospectus supplement.
160
(7) Our base management fee is 2% of our gross assets (which include any amount borrowed, i.e., total assets without deduction for any liabilities, including any borrowed amounts for non-investment purposes, for which purpose we have not and have no intention of borrowing). Although no plans are in place to borrow the full amount under our line of credit, assuming that we borrowed $1.5 billion, the 2% management fee of gross assets equals approximately 4.34% of net assets.
(8) Based on our net investment income and realized capital gains, less realized and unrealized capital losses, earned on our portfolio for the year ended March 31, 2022, all of which consisted of an income incentive fee. This historical amount has been adjusted to reflect the issuance of 50,000,000 shares of Preferred Stock. The capital gain incentive fee is paid without regard to pre-incentive fee income. For a more detailed discussion of the calculation of the two-part incentive fee, see “Management Services-Investment Advisory Agreement” in the applicable prospectus.
(9) As of March 31, 2022, we had $1.9 billion outstanding of Unsecured Notes (as defined below) in various maturities, ranging from July 15, 2022 to March 15, 2052, and interest rates, ranging from 1.50% to 6.625%, some of which are convertible into shares of the Company’s common stock at various conversion rates.
(10) “Other expenses” are based on estimated amounts for the current fiscal year. The amount shown above represents annualized expenses during our year ended March 31, 2022 representing all of our estimated recurring operating expenses (except fees and expenses reported in other items of this table) that are deducted from our operating income and reflected as expenses in our Statement of Operations. The estimate of our overhead expenses, including payments under an administration agreement with Prospect Administration, or the Administration Agreement is based on our projected allocable portion of overhead and other expenses incurred by Prospect Administration in performing its obligations under the Administration Agreement. See “Business-Management Services-Administration Agreement” in the applicable prospectus.
(11) If all 50,000,000 shares of Preferred Stock were converted into common stock and assuming all the Series A1 and Series AA1 Preferred Stock pay a Holder Optional Conversion Fee of 9.00% of the maximum public offering price disclosed within the applicable prospectus supplement and are converted at a conversion rate based on the 5-day VWAP of our common stock on March 31, 2022, which was $8.24, then management fees would be 3.34%, incentive fees payable under our Investment Advisory Agreement would be 1.46%, total advisory fees would be 4.80%, total interest expenses would be 2.45%, other expenses would be 0.58%, and total annual expenses would be 7.83% of net assets attributable to our common stock. The actual 5-day VWAP of our common stock on a conversion date may be more or less than $8.24, which may result in fees that are higher or lower than those described herein. These figures are based on the same assumptions described in the other notes to this fee table.
(12) Based on the 5.50% per annum dividend rate applicable to the A1 Shares, M1 Shares, M2 Shares, AA1 Shares, MM1 Shares, and A2 Shares. Also based on the 5.35% per annum dividend rate applicable to the A Shares. Other series of preferred stock, including other series of preferred stock being sold in different offerings, may bear different annual dividend rates. No dividend will be paid on shares of Preferred Stock after they have been converted to shares of common stock.
(13) The indirect expenses associated with the Company’s investments in collateralized loan obligations are not included in the fee table presentation, but if such expenses were included in the fee table presentation then the Company’s total annual expenses would have been 10.74%, or 12.59% after dividends on Preferred Stock.
Item 6. Exhibits
The following exhibits are filed as part of this report or hereby incorporated by reference to exhibits previously filed with the SEC (according to the number assigned to them in Item 601 of Regulation S-K):
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
